In an effort to provide additional financial protections to military families, the Department of Defense (DoD) proposed amendments to its regulations that the agency said will “reduce predatory lending practices, significantly expand the protections provided to service members, close loopholes in current rules, and help to ensure military families receive the important consumer protections they deserve.”
Building upon a voluntary partnership between the DoD and mortgage lenders announced in August, the regs would expand the protections of the Military Lending Act (MLA) to additional financial services, including payday loans, vehicle title loans, refund anticipation loans, deposit advance loans, installment loans, unsecured open-end lines of credit, and credit cards.
In 2006, the passage of the MLA capped the interest rate on covered loans to active duty service members at 36 percent (referred to as the Military Annual Percentage Rate (MAPR)), required disclosures to inform service members of their rights, and prohibited the use of arbitration clauses in contracts with service members.
The law also provided the DoD with the power to define the scope of credit covered by the statute. Initially, the agency used a narrow definition of credit that covered only three products: closed-end payday loans for no more than $2,000 and a term of 91 days or fewer; closed-end auto title loans with a term of 181 days or fewer; and closed-end tax refund anticipation loans.
Frustrated when some lenders responded by changing their terms to fall outside of the MLA’s protections, the DoD determined a broader scope of coverage was necessary. “Today, some lenders continue to market loans at triple-digit interest rates targeting service members, including storefronts clustered outside military installations and on websites geared toward service members,” the agency said in a press release.
The new regulations will end such activity, which the DoD said negatively impacts military readiness and can make the transition from military service to civilian life “significantly” more challenging. Pursuant to the proposal, the MLA would be extended to active duty service members and their families when seeking credit subject to the requirements of the Truth in Lending Act (TILA), with purchase-money loans and loans secured by real estate excluded.
For service members, that means the extension of the MAPR to additional credit products – although an exception exists for bona fide credit card account fees that are reasonable and customary – as well as additional disclosures for military borrowers, including a statement to consider options other than high-cost credit. In addition, creditors under the proposal would be prohibited from including an arbitration provision in contracts with service members or requiring military borrowers to waive their rights under the Service members Civil Relief Act for products covered by TILA.
Lenders would also benefit from the tweaks to the MLA, the DoD said, by simplifying the disclosure obligations to borrowers covered under the statute. “The proposal would rely on existing protections under TILA and would provide for a non-numerical descriptive statement of Military APR that would be consistent across loans offered to service members,” the agency said.
In addition, the regs propose to allow lenders access to an existing DoD database to check the status of borrowers to determine if the MLA covers them. Use of the database would provide a safe harbor from liability under the statute, the agency noted.
To read the proposed regulations, click here.
Why it matters: The DoD’s proposed regulations – currently open for public comment – move application of the MLA away from a product-by-product approach, the agency explained, towards a more comprehensive alignment with credit products that are already regulated under TILA. In addition to expanding the scope of existing rules to cover more types of loans, the proposal would prohibit binding arbitration, a common feature in credit card agreements. While the changes would obviously impact service members, the DoD regulations could also have an impact on other loans. For example, the 36 percent MAPR has become an informal limit for the pricing of some subprime products. So the prohibition on mandatory arbitration could have an impact on credit cards generally and influence the upcoming Consumer Financial Protection Bureau rulemaking with respect to arbitration clauses.