WASHINGTON—The Consumer Financial Protection Bureau (CFPB) has issued a new report that it says highlights how loopholes in the current Military Lending Act rules are racking up costs for service members.
According to the report, these gaps have allowed companies to offer high-cost loans to military families by skirting the 36% rate cap and other military-specific credit protections.
The CFPB has included its findings in a comment filed in support of the Department of Defense’s proposal to broaden the scope of the Military Lending Act rules to cover deposit advance products, and more types of payday, auto title, and installment loans.
Credit unions and their trade groups have also offered input to the DoD and are seeking an exemption from the proposal.
“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 statement. “The Department of Defense’s proposed revisions will go a long way toward better shielding our military from high-cost credit products.”
The current rules under the Military Lending Act provide service members and their dependents with specific protections for their consumer credit transactions. But the CFPB notes its 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.
The Department of Defense recently proposed broadening the scope to generally 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 proposal would expand the rules to cover many more types of credit, including deposit advance products, and more types of payday, auto title, and installment loans.
In its report, the CFPB said it found one off-shore-based Internet lender that was able to make a loan to a member of the military with an APR of 584%.
Among its findings, the CFPB said it examined deposit advance products over a 12-month period, finding the products are frequently structured as open-end lines of credit that fall outside of the protections of the Military Lending Act.
Among its findings:
- Service members took out more deposit advance products than civilians: Specifically, 22% of service member accounts obtained at least one deposit advance, compared to 16% of accounts held by service members and the general population.
- Service members paid about $5 million in fees for these products: Looking at a sample of loans in a one-year timespan, the report estimates that service member borrowers took more than $50 million in deposit advances. For a typical fee of $10 per $100, these $50 million in advances would be associated with about $5 million in fees.
- Service members paid more than 300% APR: The findings indicate that some depository institutions extended millions of dollars in deposit advance loans to service members with APRs that typically exceeded 300%. But deposit advance loans structured as open-end lines of credit are not subject to the act’s limitations under the current rules, the CFPB said.
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