Ensuring that service members have protections for all types of high-cost credit products

The men and women who serve our armed forces are uniquely vulnerable to debt traps caused by high-cost credit products.

Many  service members are young, face expensive situations where they must pick up and move at the drop of a hat, and may be stationed far from family and friends who could help them in times of need. High-cost lenders know that these factors make quick cash alluring to service members and frequently set up shop near military bases. The cycle of debt can be especially devastating for service members, who could lose their security clearance and even their jobs due to blemished credit histories.

The Military Lending Act (MLA) was passed in 2007 in response to serious concerns about the effects that predatory lending is having on service members and their families. As part of the National Defense Authorization Act, the MLA placed protections on certain types of high-cost credit products like payday loans, auto title loans, and refund anticipation loans. The Act limits the military annual percentage rate (APR) for these products to 36 percent, prohibits automatic refinancing, and prevents lenders from securing the loans with a post-dated check, direct access to a service member’s bank account, or voluntary military allotment.

While the MLA is certainly helpful, it does not cover all types of high-cost loans. Only payday loans with terms of 91 days or less are covered, and only auto title loans with terms of 181 days or less are covered. In other states, that might be enough to adequately protect military families but, in Illinois, it’s not.

Reforms to both Illinois’ Payday Loan Reform Act (PLRA) and Consumer Installment Loan Act (CILA) have created a market with a number of high-cost products that don’t fall under the MLA’s protections. Payday installment loans are payday loans with terms of longer than 91 days and can have an APR of up to 400 percent. Consumer Installment Loans have minimum terms of 180 days and lenders can charge up to 99 percent APR. There is no rate cap and no maximum term for auto title loans in Illinois.

By 2012, traditional payday loans made up only 14 percent of Illinois’ consumer loan market share. Payday installment and consumer installment loans made up 76 percent of the market and auto title loans took up the remaining 10 percent. Given the limited scope of the MLA, military families are not protected from 86 percent of the payday and installment loans made in Illinois are not restricted to a 36 percent military APR. Illinois is not alone. Ten other states offer high-cost payday loan products that are not covered by the MLA, and at least 12 states offer auto title loans that are not covered. We believe service members should be protected from high-cost lending regardless of their state of residence.

Thankfully, we have the opportunity to fix this problem. The Department of Defense (DoD) is currently deciding whether to expand protections under the MLA. Woodstock Institute submitted comments to the DoD last week, along with a number of our national colleagues. We urged the DoD to expand the MLA to include all forms of high-cost credit covered by the Truth in Lending Act as well as overdraft protection and rent-to-own transactions. Illinois Representative Tammy Duckworth also submitted a letter, signed by 53 of her U.S. House colleagues, urging the DoD to consider a more inclusive definition of credit loans in the MLA.

The Department of Defense will review comments and make a final determination in the coming months. In the meantime, Woodstock Institute and our allies will continue to push federal regulators to enact strong protections for high-cost loans, ensuring that everyone is protected from predatory, triple-digit interest rates.