Congress Moves to Protect Service Members from High-Cost Credit Products

Thanks to provisions included in the National Defense Authorization Act for FY 2013, service members will be better protected against abusive interest rates and loan security requirements in connection with high-cost credit products.

The provisions amend the Military Lending Act (MLA) of 2007 and empower the Consumer Financial Protection Bureau and the Federal Trade Commission to enforce the MLA’s 36 percent rate cap and other important safeguards. In addition, the Department of Defense (DOD) will be required to conduct a detailed study of the abusive credit products frequently used by service members. Once that report is issued, the Department will review the effectiveness of existing MLA rules and evaluate the need for new rules to bring lenders into compliance.

The 2007 law set an inclusive rate cap of 36 percent on all loans to service members. It also barred lenders from securing loans with personal checks, debit authorizations, allotments of military wages, or car titles.

Under the DOD’s current rules, however, these protections apply only to short-term payday loans, car title loans, and tax refund anticipation loans, and not to similar loans with longer payback periods. A Consumer Federation of America Report released in June 2012 found lenders taking advantage of these definitional loopholes to offer long-term or “open-ended” variants of the loan products excluded from the DOD definition and not subject to the MLA protections.

On December 4, the Senate approved a Defense authorization bill (S. 3254) that specifically applied the 36 percent rate cap and loan security restrictions to longer-term loans and open-ended credit. The Senate bill would not have required a lengthy study and rulemaking process. Unfortunately, these provisions were not included in an earlier, House-approved bill, and were dropped from the legislation finally approved by both chambers.


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