Nearly three months ago the Obama administration and the Department of Defense announced a proposed overhaul of the Military Lending Act that would aim to close loopholes regularly exploited by predatory lenders in order to sink their hooks into military borrowers. Now, a new report from the Consumer Financial Protection Bureau highlights just how devastating – and costly – those loopholes can be for servicemembers.
The CFPB’s report [PDF] found that predatory lenders have continued to target military families with high-cost loans despite protections guaranteed through the Military Lending Act.
Officials with the Bureau say that the Department of Defense’s proposed changes to the rules would provide significant improvements to the protections given to military members and their families.
As Consumerist has previously reported, shady lenders have been able to exploit loopholes in the current rules by creating products that are nearly indistinguishable from those prohibited by MLA.
Those exploitations were confirmed in the CFPB’s latest report, which found that 22% of servicemembers took out more than $50 million in deposit advances during a 12-month period. Of those advances, the CFPB estimates servicemembers paid nearly $5 million in fees.
“The findings indicate that some depository institutions extended millions of dollars in deposit advances to servicemembers with APRs that typically exceeded 300%,” the report states.
The CFPB believes these high-cost loans were made available to servicemembers because the current MLA rules only apply to three narrowly defined consumer credit products: closed-end payday loans for no more than $2,000 and with terms of 91 days or fewer; closed-end auto title loans with terms of 181 days or fewer; and closed-end tax refund anticipation loans.
According to the report, the current law’s failure to address payday loans made in excess of $2,000, allowed a California company to charge a servicemember an APR of 219% on a $2,600 loan. In all, the servicemember paid $3,966.84.
The CFPB found the current law also fails to address longer-term payday and auto title loans that can be just as devastating as typical short-term loans covered by the current MLA.
As an example the CFPB report details how an Illinois lender was able to skirt the rules by offering a 12-month contract term for an auto title loan for a servicemember’s spouse. Because the loan was longer than 181 days, the lender was able to charge an APR of 300%. In the end, the servicemember’s spouse spent $5,70.24 to borrow just $2,575.
Additionally, the CFPB report found that current MLA rules do not cover high-interest loans that are structured as open-ended lines of credit. Because of this failure, the CFPB found that an Internet-based lenders was able to charge military members an interest rate of 584%.
To better protect servicemembers from increasingly sly predatory lenders, the CFPB urges the DoD to finalize proposed changes that would afford new, stricter protections to members of the military.
Under the proposal, the DoD would broaden the scope of the current MLA to include credit offered or extended to active-duty military members that has a finance charge or is payable under a written agreement in more than four installments.
The proposed changes would expand the definition of “consumers credit” covered by the regulation and bring any closed- or open-end loan within scope of the regulation. The rule would only exclude loans secured by real estate or a purchase-money loan such as those used to buy cars.
If the proposal passes muster, creditors would also be required to provide military borrowers with additional disclosures, including a statement that the servicemember should seek other options than high-cost credit.
Additionally, creditors would be prohibited from requiring servicemembers to submit to arbitration, waive their rights under the servicemembers’ Civil Relief Act, or impose onerous legal notice requirements as a result of taking out a loan.
CFPB Report Finds Loopholes In Military Lending Act Rules Rack Up Costs For Servicemembers [CFPB]