In 2007, the Department of Defense (DoD) fundamentally changed the lending field for members of the Armed Forces and their dependents.  Under the authority granted by Congress in the Military Lending Act in 2006, the DoD adopted a rule that created and then capped the Military Annual Percentage Rate (MAPR) at 36% on payday loans, title loans under 181 days and refund anticipation loans to service members and their families.

Now, the DoD has decided that it wants authority to cap the MAPR on many more closed-end and open-end credit loans.  The rationale is that some creditors have evaded the 2006 restrictions by modifying their loan products to circumvent the restrictions.

The proposed new regulation, applicable to approximately 3 million people, will have a dramatic effect on traditional installment lenders.

Specifically, the proposed regulation

  • applies the 36% cap to additional loans, including credit cards, and any closed or open-end loan other than a loan secured by real estate or a purchase-money loan
  • makes creditors responsible for providing military borrowers with additional disclosures, including a statement that they should seek other options than “high-cost credit”
  • suggests that service members seek financial counseling and assistance from the Military Aid Societies
  • prohibits mandatory arbitration clauses

The difference between the MAPR and the traditional Regulation Z APR is that the MAPR includes the cost of all credit insurance premiums and most credit-related ancillary products sold in connection with a non-purchase money, non-real estate secured loan.

According to the DoD press release, “The [DoD’s] new approach would move away from the product-by-product approach that created opportunities to evade the purpose of the MLA and towards a comprehensive, no-gaps approach.”

So, what can installment lenders expect the result to be?  Is this just a further slicing-away of another 3 million people from the customer pie?

It is that, but it is more.

A finance company may, under Federal law, decline to offer a loan at terms that it does not find profitable.  But, what about reputational risk of a policy that has the effect of not lending to soldiers?  And, what about lending in those few states that have “non-discrimination against military borrowers” laws?  In those states, you may not have the option of not making loans to service members.

In its 2007 Rulemaking, the DoD recognized the fundamental truth that traditional installment lending to service members is of real value.  But now, this new regulation will eliminate the availability to service members and their families of traditional smaller loans with shorter terms.  This will only encourage larger loans and real estate secured loans, which may not be desired or needed.

Sometimes “unintended consequences” look pretty darn consequential from the outset.