It was very fitting that the Obama Administration and Department of Defense (DoD) released the final Military Lending Act (MLA) rules on the fifth anniversary of the Dodd-Frank Wall Street Reform and Consumer Financial Protection Act of 2010 (Dodd-Frank) and the fourth anniversary of the launch of the new Consumer Financial Protection Bureau (CFPB) on July 21, 2015. The final MLA rules are a great example of how to conduct evidence-based policymaking to protect consumers from unfair and abusive financial products and practices.
While it was obvious to Holly Petraeus, Assistant Director for the Office of Servicemember Affairs, and others who visit areas near military bases that high-cost, predatory lenders were preying on vulnerable service members and their families. CFPB and DoD went to great lengths to document the types of products and fees and contractual provisions to which service members were subject, including high-cost payday loans and auto title loans, and requirements that consumer disagreements be resolved through mandatory arbitration only. The DoD also documented how service members in financial distress weakened our military readiness, for example when some members lost security clearances due to vulnerability to financial coercion. In addition, the proposed rules were subject to a public comment process in which anyone, including service members, military leaders, consumer advocates, lenders, and others, could submit comments. Only after conducting extensive research and considering the more than 500 comments received did the DoD release the final rules. This is an appropriate, democratic, evidence-based process that is emblematic of how the Obama Administration, DoD, and CFPB exercise their authority.
The final MLA rules, which expand and improve upon the earlier MLA rules, will:
- Apply market-wide to all high-cost credit products that target service members, including payday, auto title, and installment loans that were excluded from the 2007 protections;
- Cap interest and add-on fees at 36 percent for loans issued to service members and their dependents; and,
- Preserve service members’ access to the courts by prohibiting mandatory arbitration agreements.
Woodstock Institute and its allies in Illinois and across the United States had urged DoD to adopt these strong protections. Our former Woodstock colleague, Tom Feltner, Director of Financial Services for the Consumer Federation of America, played a leading role in the MLA reform efforts. Kudos, Tom! We are also grateful for Illinois Congresswoman Tammy Duckworth's efforts to ensure that industry maneuvers did not delay implementation of the final rule. We are grateful that our service members and their families will be better protected in the future from the tricks and traps that hurt families and weaken our military.
We now encourage DoD and CFPB to continue to strictly enforce the MLA. In the past, CFPB has conducted enforcement actions against financial institutions that violated the MLA. Altogether, CFPB estimates that it has collected over $10 billion from enforcement actions (including but not limited to MLA) against bank and non-bank financial institutions, including $700 million from Citi relating to its credit card practices (also announced on July 21). The money collected through such enforcement actions helps to make whole the consumers who were harmed, strengthens the agencies, and deters other financial services providers from adopting similar products or practices.
These strong MLA rules offer sound guidance for the CFPB and the Congress. While it is critically important that we protect our service members and their families, it is equally important that we protect all consumers from unfair and abusive products and practices. To the extent possible, we encourage the CFPB to adopt similar consumer protections in its forthcoming rules on payday and auto tile loans and mandatory arbitration. We also encourage the Congress to adopt a national 36-percent rate cap for consumer loans, such as proposed in US Senator Dick Durbin’s Protecting Consumers from Unreasonable Credit Rates Act.
Despite strong industry opposition, consumer advocates can declare a sound victory with the final MLA rules! A fitting way to celebrate the Dodd-Frank and CFPB birthdays, indeed.