Yesterday at the 116th Veterans of Foreign Wars National Convention in Pittsburgh, Pennsylvania, President Obama announced that the Department of Defense will expand existing credit protections afforded to service members and their families through the Military Lending Act. This announcement was made on the fifth anniversary of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
“There’s already a lot to protect our troops and families against unscrupulous predatory lenders, but some of the worst abusers — like payday lenders — are exploiting loopholes to trap our troops in a vicious cycle of crushing debt,” Obama said.
In 2006, Congress passed the Military Lending Act in order to provide protections for active-duty service members and their families in consumer credit transactions. These new provisions seek to close loopholes that predatory lenders and others were utilizing in the Act to take advantage of military personnel. The final rule comes after a 3-year research period conducted by the Department of Defense, as well as a public comment period in 2014 on the initial proposed rule. Georgia Watch provided comments on the proposed rule in December of last year.
“We were particularly concerned with how the Department would define consumer credit,” said Georgia Watch director of community education, Elise Blasingame. “We asked that they make the definition consistent with the Truth in Lending Act, ensuring that open-ended and close-ended short-term cash advance products (variants of vehicle title and payday loans) would be included.”
The final rule also defines “consumer credit” covered by the Act to include all payday loans, vehicle title loans, refund anticipation loans, deposit advance loans, installment loans, and credit cards extended to service members. All of these loans are now subject to the 36 percent interest rate cap and to other provisions of the Military Lending Act.
“We also asked the Department to consider mandating use of a national database to ensure covered borrower status before issuing a loan to a service member,” explains Blasingame. “We know that in Georgia, the use of the Covered Borrower Identification Statement, a form signed by the borrower at the time the loan is issued stating they are not active military, has not been sufficient to prevent non-compliant transactions from occurring.” In the final version of the law, use of the database for verification of covered status is permitted though not mandated.
The final rule was published in the Federal Register today and will go into effect Oct. 1, 2015, though industry will have staggered dates for compliance with different aspects of the new rule.
The final rule includes protections such as:
- 36 percent cap on the interest rate on covered loans to active-duty service members;
- charges for “add-on” products (e.g., credit default insurance) must be calculated in the military annual percentage rate, so lenders cannot skirt the rules by imposing extra fees;
- disclosures are required to alert service members of their rights; and
- creditors are prohibited from requiring a service member to submit to arbitration in a dispute.
While not all of the concerns outlined in our comments on the initial proposed rule were addressed, we see the final rule as a major win for military consumers and their families. Georgia Watch will monitor the implementation of the new regulations and the effect of these protections on military families in Georgia.