President Obama announced on Tuesday that the Department of Defense would extend existing loan protection for troops and families against predatory lenders.
Speaking to the 116th National Congress of Veterans of the Foreign War, Obama told attendees that the new rules were part of the ongoing struggle to “give our troops … every chance to enjoy the American dream.”
He pointed out that there is an existing law, the Military Lending Act of 2006, designed to protect troops and their families from “unscrupulous predatory lenders”.
“But … some of the worst abusers, like payday lenders, are taking advantage of loopholes to get our troops caught in a vicious circle of debt shredding,” Obama said. “The Department of Defense is closing those loopholes so we can protect our men and women in uniform from predatory lenders. It is the right thing to do.”
In a media conversation with reporters the night before Obama’s speech, government officials said implementation of the new rules would begin October 1, but would not take effect for troops and families for a year or more. For example, the new credit card protection will only come into effect on October 1, 2017.
But when all the new rules are finally in place, they will fill loopholes in the original rules that emerged from the 2006 law that capped annual interest rates for service members at 36 percent.
However, the law gave the DoD extensive powers to define the types of credit it covers, with the exception of mortgage or purchase-money loans such as vehicle loans. And when the DoD first implemented the law in 2007, the DoD placed tight limits on the types of loans it could cover: payday loans, vehicle title loans, and prepayment loans.
Since then, consumer advocates have regularly criticized this decision.
The new rules expand the consumer credit covered by law to include deposit advances, installment loans, and active duty credit cards.
Defense officials have recognized the need to expand since the original rules were in place, Brad Carson, who serves under the Secretary of Defense for Personnel and Readiness, said in a press interview with reporters.
“This is a historic event for us,” said Carson, adding that the new rules will improve military readiness by providing additional protection for troops and families.
For too long, lenders have unacceptably burdened military families with expensive loans, said Jeff Zients, director of the White House’s National Economic Council, who added that the new rules would provide “critical protection” to troops and families.
Defense officials worked with a number of federal agencies, including the Consumer Financial Protection Bureau, the Federal Trade Commission, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Treasury Department, in drafting the updated rules. Extensive public comments before and after the rules were proposed were also taken into account.
Some banks and credit unions have raised concerns that the proposed rules would block some affordable alternatives to robbery loans. Debbie Matz, chairman of the board of directors of the National Credit Union Administration, said the annual percentage under the Military Lending Act includes fees that are normally exempt from the APR charged to individuals outside the military community.
For example, for many small, short-term loans, an application fee of $ 20 to cover processing costs plus an interest rate of 24.6 percent would increase the military’s APR to over 36 percent.
Carson said the final rules provide some limited exemptions for small short-term loans. “That way, service members have a variety of options,” he said.
Resolving loopholes in the original DoD rules is a “sustained, long-term effort,” said Holly Petraeus, associate director of servicemember affairs for the Consumer Financial Protection Bureau.
Petraeus noted that while the Military Loans Act had positive effects on troops and their families, some predatory lenders exploited loopholes.
She gave an example of a military loan with an APR of 300 percent that was made possible because the loan was technically longer than what was covered by DoD regulations.
Such lenders often use names that sound like they are associated with the military and use military imagery to target those in the military community. Petraeus said financial advisors told her stories of many service workers struggling under the burden of high-yield credit.
A number of lenders have said that troops and families need access to these costly loans as an alternative, and for simplicity, Petraeus said, but added that when she sees 20 “quick cash” companies at the gates of a military base, “that’s not a convenience – that’s a problem.”
Karen has been reporting on military families, quality of life, and consumer issues for the Military Times for more than 30 years and is co-author of a chapter on media coverage of military families in the book A Battle Plan for Supporting Military Families. She previously worked for newspapers in Guam, Norfolk, Jacksonville, Florida, and Athens, Georgia.