We know the CFPB and U.S. Department of Defense (DoD) are laser-focused on military lending (as we have discussed here, here and here). Both agencies have a legitimate and important function in protecting Servicemembers, especially in terms of access to credit. But sometimes the best intentions…
Last week, the DoD released its long awaited Regulation revision, “Limitations on Terms of Consumer Credit Extended to Service Members and Dependents.” As we expected, the Regulation broadens the definition of “consumer credit” to cover most consumer loans. This new Regulation is a big deal for consumer finance companies, especially those that operate near military bases.
Under the current Regulation, lenders making “covered loans” (i.e., payday, title pledge and refund anticipation loans) to “covered borrowers” (i.e., members of the armed services and their dependents) may only charge up to 36 percent APR. The new Regulation issued last week greatly expands the definition of “covered loans” to other types of closed-end and open-end credit products—including traditional installment loans secured by personal property.
In a press release last week, the CFPB explained the purpose of the new Regulation, “The rule closes loopholes that have led to lenders skirting the law with products that fall outside the scope of the existing regulation.”
There was one welcomed surprise in the new Regulation, addressing a most troubling aspect for consumer finance companies— that is, how to achieve safe harbor status in determining whether the consumer is a “covered borrower”. Early versions of the Regulation provided a safe harbor only if a company first “scrubbed” applicants through a database maintained by the DoD. Consumer finance companies felt strongly that the approach, with its inevitable delays, would adversely affect traditional installment lenders since one of the key benefits of an installment loan is a quick decision.
The final Regulation now provides an alternative safe harbor. Lenders will be allowed to verify the status of a consumer by using a statement or code contained in a consumer report obtained from a nationwide credit reporting agency. Another benefit to this alternative is that consumer reporting agencies can provide prescreened lists that do not include Servicemembers.
So, how does the CFPB feel about the new Regulation? In congratulating the DoD, CFPB Director Richard Cordray chimed in, “The CFPB strongly supports the Department’s efforts to strengthen consumer protections for our nation’s military families. Today’s rule will help ensure that American Servicemembers get the legal protections they deserve.”
The consumer finance industry argued long and hard that traditional installment loans are the answer to Servicemembers’ legitimate borrowing needs, not the problem. Nevertheless, the DoD, with encouragement from the CFPB, rejected this argument. Because of this new Regulation, Servicemembers will likely have a difficult time borrowing money for personal, family and household purposes.
The new Regulation becomes effective October 1, 2015; with compliance optional until October 3, 2016.