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Some Lenders Getting Around The Military Lending Act of 2007


Those of you who have been around the military for a while remember the payday lenders right outside the gate of just about any military installation in America. Military members are lucrative prospects for the consumer credit industry, because they have steady paychecks, commanders and first sergeants who can be contacted to help pay a debt, most of their expenses paid for, and many of them rely on their financial good name and good credit to maintain security clearances.

You would think that would have translated to favorable terms of credit. You would, in many cases, be wrong. Prior to the Military Lending Act of 2007, military payday loan specialists would happily grant payday loans and loans against car titles to military service members hard up for cash. Interest rates were usurious, and the costs to rollover one short-term loan to another loan when the service member had a hard time paying the first loan off resulted in some loans costing as much as 800 percent per year.

Congress intervened in 2007 with the Military Lending Act. It was enacted as part of a larger bill, the John Warner National Defense Authorization Act of 2007.

In a nutshell, the Military Lending Act made it illegal for lenders to lend to military at interest rates greater than 36 percent per year for a short-term loan of 90 days or less. It also prohibited short-term loans secured by a post-dated check, bank accounts or car titles. The law also restricted tax refund anticipation loans – where a military service member would file their income taxes and the tax return preparer would lend them the amount of their tax return, minus interest, while the servicemember assigned the right to collect the U.S. Treasury refund itself.

The act is as leaky as a sieve.

Lenders simply responded by adjusting their practices. For example, rather than limit their interest rate to 36 percent on closed-end loans, some lenders, such as Military Financial, simply offer revolving lines of credit – at much higher rates. These loans are basically open-ended, such as a credit card. There is an overall cap, and the service member can pay down the loan or borrow the money back, up to the limit, at any time. According to the Consumer Federation of America, though, these loans could cost servicemembers up to 586 percent APR, when fees are included.


Why Don’t Regulators Step In?

As mentioned, the Military Lending Act does not regulate open-ended lines of credit such as the one offered by Military Financial. Indeed, their FAQ page addresses the question quite directly:

“Isn’t it illegal to charge more than 36% on a loan to the US Military?"

"It is illegal to charge more than 36% for a closed end loan consumer loan that is less than 90 days for repayment. A Rapid Line of Credit is not a closed end loan. It is a revolving line of credit that allows you to access the available funds in your account at any time.”

The Department of Defense drafted the final regulations, and opted for a fairly narrow interpretation of what kinds of loans and other credit products would be prohibited by the Act. DoD officials had to walk a fine line: A loan with terms that might look onerous to a major with a USAA membership and a long-established credit history might be a desperately-needed godsend to an E-4 with two children struggling with an immediate need for cash for a car repair to get to work.

The DoD therefore focused the regulation on loans under $2,000, and limited them to closed-end (fixed term and payment) loans for 91 days on less, secured by a check or other hold on funds in the service-member’s bank account.

The law also bans prepayment penalties on covered loans.

The DoD also restricted car title loans with terms of 181 days or less, except where the loan was to buy the car.

So what’s not covered?

  • Residential mortgages, including refinancing, home equity loans or lines of credit, and reverse mortgages.
  • Credit to finance the purchase or lease of a vehicle, and secured by the vehicle being purchased or leased.
  • Open-end loans, including open-end payday loans and car note loans.
  • Overdraft loans
  • Rent-to-own transactions
  • Any loans not subject to the Truth in Lending Act, requiring lenders to clearly disclose the terms and costs of all covered loans
  • Any installment loans longer than 91 days
  • Loans for purchases or leases, where the item being purchased or leased is itself the security for the loan.
  • Loans to qualified retirement plans.

Also, the 36 percent cap includes most fees, but not default or late payment fees.

The law also makes it impossible for borrowers to sign away legal rights. For example, prior to the Act, some lenders would require borrowers to sign acts requiring them to use arbitration services rather than a lawsuit, in the event of a dispute.

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