Updated Military Lending Act caps card interest
By Susan Johnston Taylor
November 9, 2015
Military service members have long been targets of predatory payday lenders extending credit at high interest rates and for title loans with unfavorable terms, but more rules protecting them just went into effect.
The Department of Defense expanded the Military Lending Act this summer to close loopholes in the original law. The new rules took effect Oct. 1, but will apply only to future accounts or transactions. For most financial and credit products, the effective date will be Oct. 3, 2016, and for credit cards, the new rules start Oct. 3, 2017.
The updated MLA is needed because service members are an easy mark, says Rob Aeschbach, owner of The Military Financial Planner, an investment advisory service.
Many young enlistees aren't financially savvy yet, so when they're offered financing, they'll take out a loan to cover furniture, cars or even a dog without shopping around first or fully understanding how the loan works, he adds. “Everybody's willing to offer them a loan because they know they've got a regular paycheck,” says Aeschbach.
To curb some of the predatory lending practices, Congress passed the Military Lending Act (MLA) in 2006. The original MLA capped consumer loan interest rates to service members and their families at 36 percent interest. But MLA didn't cover credit cards and left loopholes that let lenders circumvent the rules.
For instance, payday lenders would set up shop on nearby Indian reservations where they wouldn't be subject to U.S. federal law, according to Doug Nordman, a retired Navy submariner and author of “The Military Guide to Financial Independence and Retirement.” They could also tack on fees that made the effective interest rate much higher, even as they technically complied with the rate cap.
Lenders also found ways to skirt the law and charge much higher interest rates.
The biggest problem with a lot of military members that I've witnessed personally is a lack of education and not understanding how credit works. Maybe they don't have a credit history established, so they'll take the first offer they get instead of methodically building credit. Lack of general knowledge is a problem.”
— Ryan Guina,
founder of The Military Wallet
For instance, the Consumer Finance Protection Bureau uncovered an auto title loan extended to the spouse of a service member at an APR of 300 percent. The $2,575 loan, for a 12-month term, carried a finance charge of $5,720.24. The MLA bars lenders from charging an interest rate of 36 percent, but the auto title loan in Illinois wasn't covered by the MLA because the contract term was for longer than 181 days.
In another case cited by the CFPB, a service member was extended a line of credit with an APR of 584 percent through an offshore-based Internet lender. The lender tacked on a “credit access fee” and a “transfer fee” each time the service member drew on the $1447 credit line. Because the loan to a borrower in Delaware was structured as an open-end line of credit, it was not covered by the MLA.
“The current rules under the Military Lending Act are akin to sending a soldier into battle with a flak jacket but no helmet,” CFPB Director Richard Cordray said in a news release about the proposed changes to the law. “The Department of Defense's proposed revisions will go a long way toward better shielding our military from high-cost credit products.”
The updated MLA rules:
- Set a 36 percent Annual Percentage Rate limit (called the Military Annual Percentage Rate) on all interest and fees associated with consumer credit. The prior 36 percent interest cap now applies to credit cards, installment loans and student loans not made under Title IV of the Higher Education Act. (Mortgages are not covered by MLA's definition of consumer credit.)
- Define consumer credit to include all payday loans, vehicle title loans, refund anticipation loans, deposit advance loans, installment loans and credit cards extended to service members.
- Count charges for most “add-on” products (such as credit default insurance) in calculating the military annual percentage rate, so lenders cannot skirt the rules by imposing extra fees.
- Prohibit creditors from requiring service members to submit to mandatory arbitration.
- Bar a payroll allotment as a condition of obtaining credit (other than from relief societies). In the past, lenders could use “allotments” to get money directly from a service member's paycheck instead of from his or her bank account, says Ryan Guina, founder of The Military Wallet.
While the updated MLA offers additional protections, the Servicemembers Civil Relief Act (SCRA) caps interest at 6 percent on loans incurred before soldiers go on active duty. And soldiers have to request the cap in writing.
“When you're deployed to a combat zone, pay is all tax free,” he says, so being on active duty is a good time to pay down any debt a service member has accrued.
While MLA aims to protect service members from predatory lenders, Guina says that better financial literacy of service members is also needed.
“The biggest problem with a lot of military members that I've witnessed personally is a lack of education and not understanding how credit works,” he says. “Maybe they don't have a credit history established, so they'll take the first offer they get instead of methodically building credit. Lack of general knowledge is a problem.”