WASHINGTON, DC – After an uphill battle, U.S. Senator Jack Reed’s (D-RI) efforts to protect soldiers and their families from abusive financial practices took a major step forward.  Today, U.S. Secretary of Defense Chuck Hagel announced that the Department of Defense (DOD) is proposing new rules and guidelines to help prevent lenders from charging excessive fees and taking advantage of military families.

Following a 2006 Pentagon report that found that “predatory lending undermines military readiness, harms the morale of troops and their families, and adds to the cost of fielding an all-volunteer fighting force,” Congress passed the Military Lending Act (MLA).  This law capped the annual interest rates for consumer credit to service members and their dependents at 36% while giving DOD the authority to define what loans should be covered.  The DOD’s 2007 implementing regulations narrowly included only three types of loans: (1) payday loans: closed-end loans with terms of 91 days or fewer, for $2,000 or less; (2) auto title loans: closed-end loans with terms of 181 days or fewer; and (3) refund anticipation loans: closed-end credit.

Today’s announcement means DOD is proposing to broaden the definition to include more types of consumer credit.  Specifically, it will:

  • Extend the 36 percent interest-rate limit to cover all interest and fees associated with the loan and is referred to as the Military Annual Percentage Rate or MAPR;
  • Require the creditor to provide military borrowers with additional disclosures, including a statement that they should seek other options than high-cost credit, to include financial counseling and assistance from the Military Aid Societies; and
  • Prohibit creditors from requiring service members to submit to arbitration, waive their rights under the Servicemembers' Civil Relief Act, or impose onerous legal notice requirements as a result of taking one of these loans.

“This is good news for our troops and their families that will help prevent unscrupulous lenders from targeting our soldiers and saddling them with unnecessary debt.  I applaud Secretary Hagel for taking this important step, and I thank CFPB Director Cordray and Assistant Director for Servicemember Affairs Holly Petraeus for their continued advocacy for our service members and their families," said Reed, a former Army Ranger and senior member of the Armed Services and Banking Committees.  “This lets our troops know we have their backs and are looking out for their future while they are out there working hard to protect us.  We need to aggressively go after those who try to financially exploit our service members and these new rules provide some additional ammunition to do so.”

In addition to supporting the original MLA in 2006, Senator Reed has led efforts to strengthen it and protect military families.

He wrote the law creating the Office of Servicemember Affairs within the Consumer Financial Protection Bureau (CFPB) to serve as a watchdog for military personnel.  This office educates and empowers service members and their families to make better-informed decisions regarding consumer financial products and services.

He also included language in the FY2013 Defense Authorization Act requiring the Pentagon to study the effectiveness of the Military Lending Act, which contributed to today’s announcement, and authorizing all federal agencies responsible for federal credit laws to use their civil enforcement capabilities to enforce the 36% interest rate cap required by the Military Lending Act.

“Predatory lending, unfortunately, continues to evolve, and we need to strengthen our consumer protections to keep up.  Plugging these MLA loopholes is an important step toward protecting our service members and their families.  It sends unscrupulous lenders a clear message: we will not allow our troops to be exploited, especially while they are fighting to protect us, and we are cracking down on abusive practices,” said Reed.

According to the Consumer Federation of America, the following are examples of existing loopholes in the Military Lending Act:

360 percent Online Installment Loan - A sailor borrowed $500 from an online lender in 2012 and was charged $523 in interest, for a total repayment of $1,024 for a loan over 140 days.  Since the term of the loan exceeded 91 days, the MLA protections do not apply.

Two-Year Car Title Loan at 125 percent APR - A service member in California was charged 124.7 percent APR for a car title loan repaid in 24 monthly installments.  The loan of $2,529 cost $4,426.68 in finance charges for a total repayment of $6,955.68.  Since the DOD MLA rules define covered title loans as 181 days or less, this loan was not protected.  Extra fees added to the $2,510 cash loan included a $19 DMV Lien Fee and a $75 GAP waiver.  Since the loan exceeded the $2,500 threshold for California’s small loan law coverage, the rate charged was not limited by either the Military Lending Act or state credit limits.  The loan was secured by the service member’s vehicle, which could be repossessed on default.  The first payment option provided was to sign up for electronic funds transfer directly from the borrower’s bank account.

400 percent Title Installment Loan - A South Carolina lender made a vehicle title loan to a service member on June 24, 2011 on a 13-year old car. The loan amount was $1,615 to be repaid in 32 months with $15,613 in interest at a 400 percent annual percentage rate.   The title loan was exempt from the current rule’s scope as the loan term exceeded 181 days.  The loan included a mandatory arbitration clause that would have been prohibited if the loan was covered by the MLA.

DOD developed the proposed rule after consultation with the U.S. Treasury Department, the Federal Trade Commission (FTC), the Board of Governors of the Federal Reserve System, the Consumer Financial Protection Bureau, the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), and the National Credit Union Administration. 

Now that DOD has proposed the rule change, the public and stakeholders will have an opportunity to provide feedback.