The Department of Defense proposed rules published targeting the practices of a wide range of high-cost lenders today and prohibiting them from charging service members interest rates above 36%.
The new rules would revise the Military Loans Act, which, when enacted in 2007, narrowly defined potentially abusive loans. But as ProPublica and Marketplace reported last year, expensive lenders easily circumvented the law by offering longer term loans. As a result, those offering payday loans, car titles and installment payments continued to sell credit in street-side stores near military bases.
The new rules would have a substantial impact. A Defense Ministry investigation earlier this year found that 11 percent of service members reported taking out a loan with interest greater than 36 percent in the past year. The survey also found that service members were a prime target for such loans: typically young, financially ill-advised, and often stretched out trying to support a family on a tight budget.
In our story last year, we focused on the case of a Marine who, in order to borrow $ 1,600, agreed to repay $ 17,228 to an auto title lender over two and a half years – a loan at 400% interest. When he couldn’t keep the payments, his car was taken back. Under the new rules, it would be illegal for payday and auto title lenders to make such longer-term loans at high rates.
The new rules would also restrict installment lenders, who are not covered at all by the current law. Due to the law’s exclusive focus on short-term credit, installment lenders have been free to charge service members well above 36% interest rates, as well as lard loans with almost useless insurance products which mainly serve to increase the cost.
Installment lenders, whose loans typically last five months or more, often provide loans to service members. World Finance – one of the largest installment lenders in the country and the subject of investigation by ProPublica and Marketplace – said last year that about 5 percent of its loans, or about 40,000, were made to members or their families.
In a report last spring, the Department of Defense, citing The ProPublica and Marketplace investigation said that the practice of installment lenders of packing expensive and unnecessary insurance products was one of the reasons for expanding the scope of the military loan law.
While the new rules will be very broad in scope, there are two notable exclusions: residential mortgages and “buy” loans, that is, financing to purchase a vehicle or other property. personal. (These are different from title loans, which offer money and use a borrower’s car as collateral.) The exclusions date back to the original wording of the military loans law, said Tom Feltner of the Consumer Federation of America: The law has given the power to define the types of loans covered, but with the exception of these two types.
ProPublica published a survey earlier this year from a large retailer, USA Discounters, which has a large customer base of service members. The company’s loans, made to finance electronics, appliances and other types of purchases, also include add-on products that inflate the cost. Because the company provides loans to finance the purchase of its products, it would not be affected by the new rules.
There will be a 60-day period for the public to comment on the proposed rule changes before the Department of Defense can proceed to a final version.
Overall, the Defense Department’s new rules are a “strong and important step,” Feltner said, but added that regulators will need to remain vigilant and respond to the types of credit not covered by the new rules.