We write weekly about the CFPB as the 800 pound gorilla challenging the daily business life of traditional installment lenders. There is no question that the CFPB is an agency to be respected and frankly, feared. But, there is actually another agency of the federal government, whose intrusion into the world of consumer finance may well have a more debilitating and long-term effect. That agency is the U.S. Department of Defense (DoD).
Historically, we had never thought of the DoD as having anything to do with traditional installment lending. Then, several years ago, the Secretary of Defense was given authority under the Military Lending Act to regulate certain types of loans to Servicemembers and their dependents. The loans that were regulated were payday loans, refund anticipation loans and short term, non-purchase money vehicle secured loans, having a “military” annual percentage rate (APR) in excess of 36%. The so-called military APR (MAPR) is a much different statement of finance charge than the traditional Truth-in-Lending Act definition of APR because it includes all ancillary products that are a part of the loan transaction. As a result, an MAPR of 36% may well equate to an APR of only 18%. So much for “truth” in lending.
Last year, as we discussed here, the DoD revised its regulations to bring within its prohibition on loans in excess of 36% MAPR, traditional installment loans. As a result, traditional installment loans to Servicemembers and their dependents may not exceed 36% MAPR beginning on October 3, 2016. Further, such loans may not include pre-dispute arbitration as a remedy for resolving disputes. And, the penalties for violation are severe.
The consequences of the DoD's new regulation will certainly be to deny traditional installment loans to Servicemembers and their dependents. The DoD has apparently decided that it is in the best interest of the armed services to limit the availability of installment loans to Servicemembers and their dependents. This is not an unintended consequence. This is a very intentional result, and one that we are about to see played out on the national stage very soon.
The scary part of this decision, perhaps unintended, is that traditional installment lenders will be advised to “screen” each and every one of their loan applicants to determine whether or not such applicants are Servicemembers or dependents. There are 10s of millions of such transactions annually. Such screening is necessary to avoid inadvertently violating the Military Lending Act by making an installment loan in excess of a 36% MAPR to a Servicemember or dependent. The prior safe harbor – which simply had the applicant state whether or not the applicant was a “covered borrower” – will not be sufficient after the October date.
The result of all of this is that lending and borrowing is going to be more costly as lenders must incur the additional expense in order to make certain that they continue to comply with the consumer finance laws—including the one now brought to us courtesy of the Department of Defense.