Pentagon taking on predatory lenders with new regulations
WASHINGTON — As the Pentagon wages war against militants overseas, it’s also ramping up its battle with a foe here at home: unscrupulous money lenders who prey on servicemembers.
On Friday, the Defense Department announced a proposal to change regulations that have proven insufficient in protecting troops from shady financial practices. The move would expand the protections of the Military Lending Act to all forms of payday loans, vehicle title loans, refund anticipation loans, deposit advance loans, installment loans, unsecured open-end lines of credit and credit cards.
The act, passed by Congress in 2006, includes the following protections for active-duty troops taking out loans covered by DOD regulations:
■ Imposes a 36 percent interest-rate limit that covers all interest and fees.
■ Prohibits creditors from requiring servicemembers to submit to arbitration or imposing onerous legal notice requirements as a result of taking one of these loans.
■ Prohibits creditors from forcing troops to waive their rights to certain credit protections afforded by law to servicemembers called up for active duty or deploying overseas.
The Pentagon said the proposed changes to the regulations are needed because the scope of the types of credit covered by DOD rules is too narrow. The current rules, put in place by the department in 2007, essentially limits coverage to payday and auto-title loans with relatively short-term periods, as well as tax refund anticipation loans.
“Some lenders responded by changing their products to fall outside the regulations narrow scope, thus allowing many predatory lending practices to continue and defeating diminishing the full impact of the legislation to protect our Military families,” DOD said in a press release announcing the proposal.
Examples of such behavior include extending the loan term period beyond the 91-day or 181-day thresholds and then charging triple-digit interest rates.
“Definitions of problematic credit no longer appear to function well in the current marketplace. The complexity of the marketplace appears to be better accommodated with a more comprehensive approach,” DOD said in an April report about servicemember borrowing.
Storefronts clustered outside military installations and websites geared toward servicemembers are often used to draw troops into taking out high interest and other problematic loans. A Defense Manpower Data Center survey revealed that 11 percent of enlisted troops reported using loans with interest rates higher than the 36 percent cap that Congress tried to impose.
Tales of unscrupulous lending have sparked moral outrage among officials and veterans advocacy groups.
“No one who serves our country in uniform — especially during a time of war — should ever fall victim to predatory financial practices,” Secretary of Defense Chuck Hagel said in a statement earlier this year.
But Pentagon leaders also see excessive debt as a threat to military readiness. Servicemembers in dire financial straits may lose their security clearances or be forced to leave the military.
“Losing qualified servicemembers due to personal issues, such as financial instability, causes loss of mission capability and drives significant replacement costs,” DOD said in the April report.
The Pentagon estimates that it costs about $57,000 to replace troops who separate because of money problems.
The proposed to change the regulations will be published in the Federal Register for public comment on Monday. Congressional approval is not needed to make the changes. DOD did not say when the new rules are expected to go into effect.