It has been nearly three months since the changes to the Military Lending Act Regulations became final and fully applicable to traditional installment lenders. While it is still early to measure the full impact of the changes on active duty military and their dependents, we do have some preliminary information.
Recall that effective October 3, 2016, traditional installment loans in excess of 36% MAPR (an “all-in” calculation of the traditional Annual Percentage Rate inclusive of ancillary products and services) could no longer be made to active duty Servicemembers and their dependents as a result of a change in Regulation. The Regulation of the Department of Defense was designed to protect Servicemembers and their families from improvident loans. Originally the rule was limited in its application to payday, title pledge and refund anticipation loans in excess of 36% MAPR; but, effective October 3rd, traditional installment loans became covered as well. We predicted prior to the Regulation's final effective date that Servicemembers and dependents would lose a valuable source of fair and equitable consumer loans when this regulation became effective.
Our unscientific poll of traditional installment lenders reveals that most have indeed ceased making loans to active duty Servicemembers and dependents. The profitability on small dollar loans – those up to $2000 – is simply not sustainable at a 36% MAPR. Certainly most Servicemembers and their dependents are good credit risks. However, the cost of originating and servicing such loans, and the percentage of bad debt sustained in making such loans, does not justify the business model. Accordingly, there has been an exodus by many finance companies from this market.
Some traditional installment lenders located near military bases have closed their offices. Others, whose preferred customers were active duty military, have seen their volumes drop 20%. Still others, not located near military installations, are turning down applications from active duty military and/or dependents weekly, if not daily. What we do not know yet is what those who are denied credit are doing as a result. For example, are such Servicemembers deferring purchases and managing their household incomes better; are they going to family and friends for their borrowing needs; or are they turning to underground lenders or off-shore lenders who ignore the Military Lending Act?
It has been suggested by some that traditional installment lenders can make profitable loans at less than 36% MAPR if they increase the amounts loaned and lengthen the loan repayment term. Doing this, however, is certainly not in the best interest of the Servicemember who hasn't sought a larger loan, and doesn't want a long-term repayment obligation.
We look forward to learning more about the direct impact on Servicemembers and their dependents resulting from the change in the Regulation. Has the new Regulation been good for these consumers? We already know that it has not been good for traditional installment lenders.