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Nearly a decade after legislation was put in place to protect U.S. military personnel and their families from predatory financial products, the Military Lending Act received a much-needed update to close loopholes often exploited by shady lenders to skirt the rules and put the financial lives of servicemembers at risk.
Today, President Barack Obama announced that the Department of Defense finalized improvements to MLA rules – first passed in 2006 – that include a more comprehensive definition of “consumer credit” to cover additional loan products and further prohibitions on the use of forced arbitration provisions in credit products.
Under the revamped rules, the definition of consumer credit expands to cover all payday loans, vehicle title loans, refund anticipation loans, deposit advance loans, installment loans, and credit cards extended to service members. These products will now be subject to the current 36% interest rate cap service members and their families receive under MLA.
This broader definition closes a loophole that allowed predatory lenders to continue targeting servicemembers by offering loans that were above $2,000 or had a duration of more than 91 days.
Additionally, the expanded MLA now counts charges for add-on services, such as credit default insurance or identity theft monitoring products, toward the military annual percentage rate. This means lenders can no longer skirt rate cap rules by imposing extra fees.
“For too long, predatory loans have trapped some members of our military in an endless cycle of debt, adding financial strains to families that already bear the burden of defending our country,” the White House said in a statement. “By distracting our troops with financial challenges or forcing them to leave military service to pay off debts, these abusive loans negatively impact military readiness.”
As for forced arbitration provisions – those clauses often found buried in contracts for many credit products that prevent consumers from seeking redress for abuse in court – the upgraded rules prohibit the inclusion of such restrictions.
Brad Carson, acting under secretary of defense for personnel and readiness, tells the Military Times, that the new rules will be gradually implemented starting on Oct. 1.
Carson added that the new protections do offer some exemptions to short-term loans – like no-interest loans, grants, and scholarships from the four Military Relief Societies and some short-term loans that abide by usury rates – allowing servicemembers to “have a variety of options.”
Consumer groups, regulators and state attorneys general have been outspoken in urging the DOD to expand protections under MLA and close loopholes that cost military personnel and their families millions of dollars.
As Consumerist has previously reported, shady lenders have been able to exploit loopholes in the current rules by creating products that are nearly indistinguishable from those prohibited by MLA.
Those exploitations were confirmed in a CFPB report last year, which found that 22% of servicemembers took out more than $50 million in deposit advances during a 12-month period. Of those advances, the CFPB estimates servicemembers paid nearly $5 million in fees.
“The findings indicate that some depository institutions extended millions of dollars in deposit advances to servicemembers with APRs that typically exceeded 300%,” the CFPB report states.
The Bureau asserted back in December that such high-cost loans were made available to servicemembers because MLA rules only applied to three narrowly defined consumer credit products: closed-end payday loans for no more than $2,000 and with terms of 91 days or fewer; closed-end auto title loans with terms of 181 days or fewer; and closed-end tax refund anticipation loans.
At the time, the CFPB report found MLA’s failure to address payday loans made in excess of $2,000, allowed a California company to charge a servicemember an APR of 219% on a $2,600 loan. In all, the servicemember paid $3,966.84.
Despite the known failures of the original MLA, the road to finalizing the expanded protections has been contentious. Back in May, Congress attempted to delay implementation of the rules by at least a year through the use of a small clause in the 2016 National Defense Authorization Act that would have required the Sec. of Defense to submit a report to Congress by March 1, 2016 on any new MLA-related rules.
The small provision would have prevented the Sec. of Defense from implementing changes until 60 days after the report was submitted, essentially pushing the new rules off by nearly a year.
The provision was struck down just a week later, when Congress narrowly voted to remove the controversial language.
On Tuesday, several consumer advocacy groups, including the CFPB, approved the expanded protections covered by MLA.
CFPB director Richard Cordray said in a statement that the Bureau is ready to ensure illegal lending is not longer an issue military families must face.
“The CFPB strongly supports the Department’s efforts to strengthen consumer protections for our nation’s military families,” he said. “Today’s rule will help ensure that American servicemembers get the legal protections they deserve.”
Public Citizen said that the new rules help to ensure thousands of active service members and their families are no longer targets of unscrupulous lenders.
“Not only are today’s new rules the right thing to do to prevent the exploitation of our nation’s service members, but the Defense Department has determined that they are crucial to maintaining our military force’s readiness,” Robert Weissman, president of the advocacy group, said in a statement.
Weissman further urged regulators and lawmakers to extend protections from predatory practices to all Americans with a nationwide cap on interest rates modeled after the one included in these new rules.
The National Association of Consumer Advocates also welcomed changes under MLA and reiterated Public Citizen’s call for more protections for all consumers.
“We hope the CFPB follows the lead of the DoD to protect all consumers – both military and civilian – with a strong rule to eliminate forced arbitration clauses,” NACA’s Legislative Director Ellen Taverna said in a statement.
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