In a previous blog post, we noted that the Department of Defense (DOD) has proposed expanding the scope of Military Lending Act (MLA) protections to service members and their dependents on all payday loans, vehicle title loans, refund anticipation loans, deposit advance loans, installment loans, unsecured open-ended lines of credit, and credit cards. In 2007, the DOD implemented the MLA by issuing regulations that capped the annual interest rate lenders could charge members of the military to no more than 36%. The cap only applied to 3 types of financial products:
- Closed-end payday loans for no more than $2000 and with a term of no more than 91 days;
- Closed-end auto title loans with a term of 181 days or fewer;
- Closed-end tax refund anticipation loans.
CFPB Weighs In
Yesterday, the Consumer Financial Protection Bureau (CFPB) released a comment letter along with a “data-driven” study to the DOD, which purports to bolster its position that MLA protections are being circumvented through “legal technicalities” and more financial products need to be regulated by the MLA. CFPB’s study showed that some payday lenders are charging rates higher than the 36% cap required under the MLA for products not covered by the MLA. Their comment letter also referenced a number of anecdotes and cases in which service members were given high-cost loans. CFPB Director Richard Cordray issued a press release stating that “the current rules under the Military Lending Act are akin to sending a soldier into battle with a flak jacket but no helmet.”
Impact on Credit Unions and Community Banks
Under current National Credit Union Association regulations, federal credit unions are allowed to offer payday alternative loans with an interest rate of up to 28% and an application fee of up to $20.00. Because the proposed MLA rules cap interest rates at 36%, and includes any application fees in that calculation, the current payday alternative loans permitted to be offered by credit unions would be higher than the MLA permitted cap and federal credit unions would not be able to offer these loans to service members or their families. NCUA Board Chairman Debbie Matz has requested an exemption for payday alternative loans offered by federal credit unions, citing other protections provided to borrowers in these products, such as prohibition of prepayment penalties and rollovers. Other products that might also run afoul of the cap are open ended credit cards and overdraft lines of credit.
The American Bankers Association, the Independent Community Bankers of America, the NAFCU, the Association of Military Banks of America and the Consumers Bankers Association also commented on the proposal, noting implementation and compliance challenges with the proposal. The comment letter stated that “if the regulation is expanded as proposed, the greatly increased volume of inquiries to the Department’s database, which today is frequently unavailable, will cause consumer credit lending to come to a halt when the database is unavailable.” The letter also claimed that the costs of the proposed regulation were “grossly” underestimated because the CFPB and DOD has overlooked many financial products that are offered by depository institutions that will be impacted by the regulation. In addition, the proposed rules do not take into account continuing costs of compliance for credit unions and community banks.
The proposal is intended to stop predatory lending and will likely be successful in making these kinds of products scarcer for service members and their families. The regulation requires that lenders must screen all applicants against a DOD database before they can offer products with rates greater than 36%. This means that instead of asking borrowers to self-identify as service members, lenders must screen everyone, which would extend a regulation that currently applies to only 3 to 3.5 million households to more than 100 million American households per year. In addition, each lender would be limited to 250,000 inquiries of the DOD database per day, which is going to be a fraction of the number of transactions currently conducted daily by many lenders. Furthermore, the DOD database has historically been unreliable in handling the small volume of inquiries it currently handles. It is unclear when it will be capable of handling the large volume to be generated by the new rules. Finally, the MLA proposal includes a new civil liability provision that allows private civil actions for MLA violations in federal court. For lenders, this increased regulatory burden and litigation risk will be a significant disincentive to offering these types of products going forward.