On December 29, 2014, the Consumer Financial Protection Bureau (CFPB) issued a report on the implications of certain loopholes in the current Military Lending Act rules. The CFPB is “urging the Department of Defense to finalize” its proposed revisions to these rule. The revisions promise to expand the scope of the rules and to close many of the most significant loopholes, subjecting lenders to additional regulatory and litigation risk.
Congress enacted the Military Lending Act (the Act) in 2006 to provide special protections – such as a cap on the rate at which a creditor may extend consumer credit – to active-duty military personnel and their dependents from predatory lending practices. The Act is implemented by the Department of Defense and, through the operation of a 2013 amendment, enforced by the CFPB and several other federal agencies.
The Act applies to three forms of credit as extended to eligible individuals: “(1) closed-end payday loans with terms of 91 days or fewer and for $2,000 or less; (2) closed-end auto title loans with terms of 181 days or fewer; and (3) closed-end refund anticipation loans.” Report at p. 3. The Department of Defense’s proposed revisions would expand the scope of the Act to include many more types of credit, including deposit advance products and previously excluded types of payday, auto title, and installment loans.
The CFPB’s report, “The Extension of High-Cost Credit to Servicemembers and Their Families,” analyzed certain information to “better understand the market where servicemembers seek and obtain credit.” Report at p. 3. In summary, the report concluded:
- Servicemembers took out more deposit advances than their civilian counterparts, by a margin of 22 to 16;
- The fees paid for these deposit advances – about $5 million over one year – were significantly higher than they would have been if the deposit advances had been covered by the Military Lending Act rules; and
- Many deposit advances extended to servicemembers bore APRs of over 300 percent.
Recent guidance from the Office of the Comptroller of the Currency and Federal Deposit Insurance Corporation has already diminished the usefulness of some of these findings, as the CFPB’s study period predated these agencies’ “Guidance on Supervisory Concerns and Expectations Regarding Deposit Advance Products” (November 2013). Nonetheless, the CFPB incorporated its findings in a comment filed in support of the Department of Defense’s proposal to expand the scope of the Act’s protections. If adopted, the proposed revisions would expand the type and degree of risk for lenders.