CFPB Presses Defense Department on Lending Rule

WASHINGTON — The Consumer Financial Protection Bureau is urging the Department of Defense to finalize a proposal meant to stop lenders from offering expensive credit to military personnel.

The CFPB on Monday released a letter to the Defense Department as well as a study backing up its stance that showed some payday lenders are charging rates higher than the 36% cap required under the Military Lending Act. The Defense Department in September proposed changes to the law that would broaden its definition of credit to cover more payday-like products as well as auto title and installment loans.

The CFPB strongly supported the proposal, which would expand credit protections to the military and family members, effectively bolstering the power of the CFPB.

"As one of the agencies responsible for protecting servicemembers by enforcing the MLA [Military Lending Act], we believe that the Department's proposal, if finalized, would strengthen the ability of the Bureau and other enforcement agencies to use our authorities to stop lenders from harming servicemembers in ways the law was intended to stop," said Hollister Petraeus, the CFPB's assistant director of the Office of Servicemember Affairs, in the comment later dated Dec. 26. "Under the current MLA regulations, our research into the ongoing use of high-cost credit products by servicemembers... shows that products falling just outside the scope of the current regulation have been marketed and extended to servicemembers."

The CFPB's study pointed to "loopholes" in the Military Lending Act that allow certain creditors, like payday lenders, to offer loans at interest rates above the 36% threshold. Specifically, the CFPB said the current regulation implementing the law does not cover loans with high interest rates that are structured as an open-end line of credit. The agency further listed nearly a dozen anecdotes in its comment letter and study of cases in which servicemembers were charged well above the cap for a deposit-advance loan, with one charged a 584% annual percentage rate by an online lender based offshore.

The CFPB also took a sampling of deposit-advance loans and estimated that servicemembers borrowed more than $50 million of such loans in a one-year time span. Based on a typical fee of $10 per $100 lent, the CFPB estimates that these borrowers paid roughly $5 million in fees, which would have been "significantly less" if the Military Lending Act covered such open-end lines of credit.

"The current rules under the Military Lending Act are akin to sending a soldier into battle with a flak jacket but no helmet. To give our troops full-cover protection, the rules need to be expanded," said CFPB Director Richard Cordray in a press release. "The Department of Defense's proposed revisions will go a long way toward better shielding our military from high-cost credit products."

The CFPB is pressing the Defense Department to finish its proposal that would extend the Military Lending Act to cover more types of credit than the current rule which primarily covers shorter term payday loans, auto loans and tax refunds within a certain timeframe and amount in some cases.

"Furthermore, due to the narrow scope of the current MLA regulation, protections available to servicemembers can vary greatly depending on the particular state where they reside," Petraeus said. "The Department's proposal would help to level the playing field and provide more consistent protection for servicemembers across the country in their credit transactions."