WASHINGTON — Aiming to restrict lenders who prey on members of the military, the Obama administration on Friday moved to close legal loopholes that have placed hundreds of thousands of service members at risk of excessive payday and other short-term loan fees.
The Defense Department proposed new rules to toughen a 2006 law that limits interest rates for certain types of credit available to service members and their dependents.
Under current law, lenders cannot charge members of the military more than 36 percent interest. But the loans covered by the law are so narrowly defined that lenders, many of them located near military bases, can make simple adjustments to get around its provisions.
The proposed rules would broaden the definition of consumer credit so that more loans would fall under the provisions of the 2006 law. Final rules likely won’t take effect until next year; the public and interest groups have 60 days to comment on the plan.
Currently, transactions covered by the 36 percent cap on interest are limited to payday loans of $2,000 or less with terms of no more than 91 days, loans that are secured by a personal vehicle with terms of no more than 181 days, and tax refund anticipation loans.
But the Consumer Financial Protection Bureau and the Pentagon have found that in some cases lenders slightly altered the loans, adding $1 to the loan or one day to the terms to bypass the interest cap.
In testimony to the Senate Commerce Committee last year, Holly Petraeus, the head of the Consumer Finance Protection Bureau’s office for service member affairs, recounted instances in which service members from North Carolina and Delaware who each took out loans at an annual percentage rate of nearly 585 percent. The 36 percent cap did not apply because the loans were structured as open-end lines of credit.
“We have seen firsthand how lenders use loopholes in the rule to prey on members of the military,” said Richard Cordray, the director of the Consumer Financial Protection Bureau. “They lurk right outside of military bases, offering loans that fall just beyond the parameters of the current rule.”
The new rules would still not apply to residential mortgages and credit for personal property purchases, such as a car loan. Moreover, the 36 percent cap would apply to all interest and fees associated with a loan, and creditors would have to disclose more information about the loan and its terms to military borrowers.
In responses to an advance notice of the Pentagon’s proposal last year, financial industry representatives warned that the changes could reduce the availability of short-term credit for service members.
“We want to ensure that there are no unintended consequences from this rulemaking that would prevent credit unions, particularly those operating on military installations, from providing the safe consumer friendly products the men and women of the armed services have come to depend on,” Carrie Hunt, senior vice president at the National Association of Federal Credit Unions, said in a statement.
The Pentagon estimates that the first-year cost to lenders of complying with the new rules would be $96 million, but officials said that figure would be exceeded by the potential savings from reducing the number of service members who leave the military due to financial distress.
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