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.
military lending act
The Military Lending Act (MLA) protects servicemembers and their families from high-cost, predatory consumer credit products and caps annual percentage rates (APR) at 36 percent. Unfortunately, the current MLA definition of “consumer credit” is too narrow, allowing lenders to get around the APR cap and offer loan products that often lead to long-term debt problems.
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.
Passed by Congress in 2007, the MLA was designed to ensure that military service members and their families have access to safe and affordable small dollar loans and credit. It set a 36 percent annual percentage rate cap on certain loans and credit products offered to people who serve in the armed forces. While the law curtailed many of the worst industry practices, it was not expansive enough to cover the wide range of high-cost, predatory products that exist today.
Payday lenders are the modern day equivalent of loan sharks, aggressively marketing unaffordable loans as a way to meet a one-time need. In truth, payday lenders know that borrowers cannot both repay the loan and cover their living expenses. To do so, they will need another loan, which requires payment of another fee. This is the payday loan debt trap, where interest rates average 400 percent. The vicious cycle of debt is not a side effect of payday lending—it is the business model of payday lending. Three-quarters of payday loan fees come from borrowers with 10 or more loans per year.
Payday lenders are the modern day equivalent of loan sharks, aggressively marketing unaffordable loans as a way to meet a one-time need. In truth, payday lenders know that borrowers cannot both repay the loan and cover their living expenses. To do so, they will need another loan, which requires payment of another fee. This is the payday loan debt trap, where interest rates average 400 percent. The vicious cycle of debt is not a side effect of payday lending—it is the business model of payday lending.
The CFPB was established by the Dodd-Frank Wall Street Reform and Consumer Protection Act as the first federal financial regulator whose focus is protecting the rights of consumers.
No matter who you are—a credit card borrower, student borrower, homeowner, servicemember, or more—the CFPB is making major strides to ensure that you can safely do business with financial institutions.
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.
This comment letter encourages the Department of Defense to expand the Military Lending Act (MLA) to ensure that service members and their families are protected from all forms of high-cost credit. Passed in 2007, the MLA instituted a 36 percent annual percentage rate (APR) cap for certain kinds of payday loans and auto title loans. A number of states, including Illinois, have high-cost loan products that fall outside the boundaries of the MLA. This means the 18,000 active duty service members in Illinois are still being marketed products with triple digit interest rates.