The Consumer Financial Protection Bureau (CFPB) recently published a report detailing how loopholes in the Military Lending Act (MLA) are negatively affecting the military servicemembers it was designed to protect. When Congress passed the MLA, its purpose was to protect military servicemembers from predatory lending practices. That was back in 2007, and now the Department of Defense (DoD) has proposed revisions to the MLA that will close some of the loopholes.
CFPB notes that the current definitions of credit products in the DoD’s MLA rules are too narrow and leave many military servicemembers at risk; only three credit products are defined. CFPB’s report emphasizes the need for the DoD to change the MLA rules to include all types of payday, installment, auto title loans, and open-end lines of credit. The DoD did expand the definitions of credit products to include longer-term loans and auto title loans in its latest proposed rules.
The CFPB report mentions that, in April 2013, CFPB analyzed the use of deposit advance products, which are open-ended lines of credit that fall outside the current products covered by MLA rules. CFPB then analyzed the accounts belonging to servicemembers for 12 months. Their analysis led them to the following conclusions:
- Servicemembers took out more deposit advance products than civilians
- Servicemembers paid about $5 million in fees for these products
- Servicemembers paid more than 300 percent annual percentage rate (APR)
In another example, an offshore, internet-based lender that targeted servicemembers offered loans with an APR of 584 percent but, because the loan was structured as an open-ended line of credit, the borrower was not protected by the MLA.
CFPB also examined servicemembers’ use of several other credit products that fall outside of the current MLA’s protection. In one example, a lender licensed under the Illinois Consumer Installment Loan Act lent the spouse of a servicemember an auto title loan that had an APR of 300 percent but fell outside of the MLA rules because the loan had duration longer than 181 days. These examples illustrate how servicemembers are still at risk from predatory lending, despite the existence of the MLA. Loopholes in the existing rules are allowing lenders to offer loans with financially debilitating APRs and other consumer protection risks.
This analysis from the CFPB shows that improvements to the current MLA rules are absolutely necessary to prevent servicemembers from entering a cycle of debt. The Bureau submitted comments supporting the DoD’s proposed revisions and urging the finalization of a strong rule. Woodstock Institute also issued comments in support of the DoD’s proposed revisions to the MLA. Woodstock supported the DoD for taking the initiative to expand their protection of servicemembers through the MLA rules, but encouraged the DoD to further expand its definition of consumer credit to include overdraft programs and rent-to-own transactions. Advocates expect the Department to release its final rule in the summer of 2015.