Military payday loan laws set for review, improvements

Consumer protections for troops and their families should be expanded to not only clamp down on “morphing” payday loans, but also on products like overdraft checking, installment loans and rent-to-own contracts, some consumer advocates have told defense officials.

The recommendations — which would expand protections far beyond what anyone in the civilian community receives — are among 36 comments to the Defense Department in response to a Federal Register notice calling for input on whether existing rules on consumer credit should be enhanced.

While many financial institutions support DoD’s efforts to restrict lenders who unfairly target troops, they cautioned that if DoD goes too far, the availability of financial services and credit to the military community could decline.

Defense officials intend to have a proposed rule by the end of the calendar year, and it will be posted in the Federal Register for public comment, DoD spokesman Navy Lt. Cmdr. Nate Christensen said.

In the 2013 Defense Authorization Act, lawmakers said they believe DoD should review its regulations implementing the Military Lending Act of 2006.

The MLA was broad, setting an annual interest rate cap of 36 percent on loans made to troops and their families, among other things. Only mortgage loans and auto finance loans were excluded.

But in implementing the law, DoD narrowed the definition, limiting the 36-percent rate cap to payday loans, vehicle title loans and refund anticipation loans. And, for example, only payday loans with terms of 91 days or less and totaling no more than $2,000 are covered.

While improvements have been made since 2006, case studies illustrate the gaps in coverage, according to a 121-page comment by the Consumer Federation of America and three other groups.

Some lenders have changed their products to skirt the rules, they said, citing a statement from a military lender showing an annual percentage rate of 585 percent on a loan balance of $2,000, plus wire transfer and credit access fees. The lender changed its product to open-end payday loans after the law.

Financial institutions and companies and their associations sent 15 letters generally opposing more restrictions. A retired Army sergeant first class, a Marine Corps regional legal assistance director, and Navy-Marine Corps Relief Society, members of the House and Senate, consumer advocates, state attorneys general and state veterans affairs officials were among the 21 asking for more protections.

Examples of comments:

■Some state attorney generals noted that laws in their own states would not protect service members from interest rates exceeding 36 percent. Colorado lenders can loan troops (and anyone else) using an approximate 200-percent annual percentage rate because the state’s payday loan law now has a minimum loan term of six months.

■Installment loan company Omni Financial urged caution to ensure that troops with little or no credit history are not shut out. “In Omni’s experience, such [service members] often cannot obtain unsecured personal loans even from those banks where they maintain their own checking and savings accounts,” the company said.

The Credit Union National Association and Defense Credit Union Council provided 35 examples of credit unions on military installations that offer small-dollar loans as alternatives to payday loans.

They urged DoD to continue its “targeted approach” against abusive lending practices and “to avoid unintended consequences for credit unions and some others that provide quality financial products and services at reasonable rates.”