The Honorable Charles Timothy Hagel
Secretary of Defense
U.S. Department of Defense
1000 Defense Pentagon
Washington, D.C. 20301-3010
Re: Limitations on Terms of Consumer Credit Extended to Service Members and Dependents
Docket ID: DoD-2013-OS-0133
Dear Mr. Secretary:
The undersigned groups file this comment to the Department of Defense’s (DoD) Proposed Rule regarding “Limitations on Terms of Consumer Credit Extended to Service Members and Dependents.” We appreciate the opportunity to respond to the DoD’s notice and support the revision and expansion of the regulation beyond the current definition of “consumer credit” to one that applies to all consumer credit currently regulated under the Truth in Lending Act (TILA). This expansion will protect our nation’s active-duty service members and their dependents from high-cost, abusive credit.
Loopholes in the Military Lending Act put service members’ financial security at risk
In 2006, Congress passed the Military Lending Act (MLA) as part of the John Warner National Defense Authorization Act of 2007. The MLA was enacted to protect active-duty service members and their dependents from high-cost loans and other predatory credit practices that adversely impacted their military readiness. The MLA caps total interest and fees at 36 percent and bans harmful credit product features such as: renewals and refinances that do not benefit the borrower; forced arbitration; prepayment penalties; use of checks, vehicle titles or other automatic methods of access to the borrower’s bank account; and requiring repayment by allotment as a condition of the extension of credit.
Congress exempted residential mortgages and loans to finance the purchase of automobiles and other personal loans secured by property. It authorized the DoD to define the scope of consumer credit and creditors covered by the MLA. The DoD subsequently issued its rule defining “consumer credit” that took effect on October 1, 2007 and applied the Act’s protections only to closed-end payday loans of $2,000 or less with a loan term of 91 days or less, closed-end vehicle title loans with a loan term of 181 days or less, and tax refund anticipation loans. These narrow definitions were easily evaded by lenders who modified products to fall outside the rule’s scope by either lengthening the loan term or structuring the loan as an open-end line of credit.
• 400 percent Title Installment Loan - A South Carolina lender made a vehicle title loan to a service member on June 24, 2011 on a 13 year old car. The loan amount was $1,615 to be repaid in 32 months with $15,613 in interest at a 400 percent annual percentage rate. The title loan was exempt from the current rule’s scope as the loan term exceeded 181 days. The loan included a forced arbitration clause that would have been prohibited if the loan was covered by the MLA.
• 584 percent Open-end Line of Credit - Prior to the enactment of the MLA, one military lender made traditional closed-end payday loans but then changed its product to open-end payday loans that are exempt from the current rule’s scope. A 2012 monthly activity statement discloses a “584.68 Annual Percentage Rate” on a loan balance of $2,000, plus other fees.
• 360 percent Online Installment Loan - A Sailor borrowed $500 from an online lender in 2012 and was charged $523 in interest for a total repayment of $1,024 for a loan over 140 days. Since the term of the loan exceeded 91 days the MLA protections did not apply.
Recognizing that loopholes in the 2007 rules have allowed lenders to evade the MLA protections, Congress required DoD to issue a report to evaluate the impact of abusive credit on service members’ financial readiness. In April 2014, DoD issued their report, “Enhancement of Protections on Consumer Credit for Members of the Armed Forces and Their Dependents.” The report included the results of a service member survey and feedback from military financial counselors and found that 11 percent of enlisted service members continue to turn to high-cost credit options. The report found that military financial counselors overwhelmingly reported that service members would not be negatively impacted if access to high-cost credit was restricted. The findings suggested that applying the 36 percent rate cap on a product-by-product basis is unlikely to reduce the accessibility of high-cost and abusive credit. DoD concluded that an expanded and comprehensive definition of consumer credit would be a more effective approach to protect service members from high-cost, abusive credit.
The proposed rule provides a comprehensive approach to defining consumer credit and prevents future loopholes
The proposed rule closes the loopholes in the current rule by expanding the definition of consumer credit under the Military Lending Act to include products that are currently subject to the protections of TILA. Rather than taking a product-by-product approach, the proposed rule will prevent lenders from exploiting service members by ensuring that high-cost products with abusive terms are covered by the protections established by the MLA regardless of the term of the loan or the loan’s structure.
For example, the proposed definition of covered consumer credit would prevent lenders from structuring payday loans for longer than 91 days or larger than $2,000 for the purposes of charging higher rates. It would also stop lenders from structuring auto title loans as longer than 181 days or issuing high-cost, open-end lines of credit with abusive features that are currently exempt. Likewise, the proposed rule would cover additional high-cost products that negatively affect a service members’ financial security, such as high-cost overdraft lines of credit and abusive installment lending.
The proposed rule also addresses widespread concern about the use of add-on products. It ensures that certain additional charges, such as single premium credit insurance, debt cancellation, debt suspension or other ancillary fees are included in the calculation of interest and are capped as part of the MLA’s 36 percent interest and fee cap. Add-on products, such as insurance products, often serve as a way to increase revenue in states that restrict interest rates and significantly increase the total cost of borrowing beyond the disclosed annual interest rate.
While the proposed rule would also apply the MLA protections to credit cards for the purpose of preventing abusive lenders from using high-cost credit cards to avoid MLA protections, DoD provided important exemptions for bona fide, reasonable and customary credit card fees. Most credit cards in the marketplace would be excluded from the rule, and service members that rely on these products to meet their credit needs would not be affected.
There are several products that are not included that we believe warrant additional scrutiny. We view fee-based overdraft coverage as a high-cost credit product with similar risks as payday loans. Overdraft fees are not subject to the protections provided by TILA and would not be covered by the interest, fee cap and other protections of the MLA. A 2014 survey conducted by DoD found that while a smaller percentage of service members were enrolled in fee-based overdraft programs, those service members who were enrolled used them more frequently than non-service members. Of the service members enrolled, one in three were charged overdraft fees more than 12 times per year. Like overdraft fees, rent-to-own transactions that are not subject to TILA protections are excluded by the proposed rule. We encourage the Department of Defense to carefully review the impact that these and other excluded products have on the financial security of service members and their dependents and to take appropriate action.
The proposed rule strikes an appropriate balance between access to credit and restricting access to high-cost abusive credit. The proposed rule provides a targeted restriction for credit products that have been shown to negatively impact service members’ financial security, and ensures access to lower-cost options such as the $142 million in no-cost loans provided by Military Relief Societies in 2012.
We thank the Department of Defense for its work protecting service members from high-cost credit with abusive terms and urge the adoption of a final rule that will close the current loopholes in the definition of consumer credit and will prevent high-cost, abusive lenders from evading the protections in the MLA that keep our men and women in uniform from financial risk.