Research and Statistics

Proposal would extend Military Lending Act to credit cards


An overhaul of protections for soldiers would have a big impact on credit cards, but the proposal is heading for a fight with the banking industry

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Credit cards would be covered by the military’s anti-gouging law for the first time, under a Pentagon proposal to toughen rules that shield service members from high-rate payday loans and other expensive forms of credit.

The proposal announced Sept. 29 — which broadens the law’s existing 36 percent cap on annual interest and fees — will strengthen safeguards for soldiers, supporters said, and might also serve as a model for civilian protections down the road.

Proposal would extend Military Lending Act to credit cards

“We think the logic of protecting service members against payday loans should extend to all consumers,” said Maura Dundon, senior policy counsel at the Center for Responsible Lending. The rules would block soldiers from getting “fee harvester” credit cards whose hefty upfront application fees eat up most of the available credit.

Bankers protest
But howls from the banking industry show that the proposal, which is in a comment period until Nov. 28, faces a barrage of opposition.

“It would be a huge compliance nightmare,” said Nessa Feddis, senior vice president and deputy chief counsel  at the American Bankers Association. “The military APR calculation is very complicated and potentially subjective … and remember, you can go to jail for this.” Penalties for intentionally violating the law include up to a year in prison, the proposal states.

The Defense Department announced plans last week to broaden the rules for loans under the Military Lending Act, a 2006 law that capped payday loans and other expensive forms of credit. Passed at a time when about 150,000 U.S. troops were deployed in Iraq, the act was designed in part to protect the military’s operational readiness by reducing financial strains on soldiers and their families.

The rule was supposed to keep predatory lenders away from active duty soldiers and their families. But its narrowly written definitions allowed some high-rate payday loans and auto title loans to evade the rules.

“Some lenders responded by changing their products to fall outside the regulation’s narrow scope, thus allowing many predatory lending practices to continue,” the Defense Department said in a news release accompanying the new proposal. “Today, some lenders continue to market loans at triple-digit interest rates targeting service members, including storefronts clustered outside military installations and on websites geared toward service members.”

Lurking lenders
The lenders “lurk right outside of military bases, offering loans that fall just beyond the parameters of the current rule,” Consumer Financial Protection Bureau Director Richard Cordray said in a statement supporting the proposal. Some lenders charge service members effective rates as high as 500 percent, according to the agency.

The rule changes will do away with definitions that limited the law to payday, auto title and tax refund loans that fall within certain dollar amounts or time periods.

Instead, the rule will apply to a swath of consumer loans — including credit cards and bank overdraft programs — that are not secured by a home or by the item they’re used to purchase. For example, loans used to buy a car are exempt from the law, but title loans on a car you already own are covered.

The proposal’s 36 percent cap on annual rates includes the cost of most fees as well as interest, setting a price limit that is difficult to avoid by re-labeling charges. Its rules would also bar lenders from requiring service members to arbitrate disputes, a requirement that is now included in many credit card agreements.

“The proposed rule should not affect modestly priced, mainstream credit products that do not impose high application fees or participation fees,” the Defense Department said in its statement. An estimated 191 million transactions a year by 40,000 creditors would be covered.

Today, some lenders continue to market loans at triple-digit interest rates targeting service members, including storefronts clustered outside military installations and on websites geared toward service members.

–Department of Defense
News release

One big change for credit cards will be the prohibition of arbitration requirements, which several large issuers currently include in their card agreements. Citi, Wells Fargo, Barclaycard and U.S. Bank require customers to arbitrate disputes rather than go to court. American Express and Discover also require arbitration, but allow cardholders to opt out of the agreement within a certain time period.

Another change will involve making sure rates and fees are under the 36 percent military cap. Calculating the rate is complex, Feddis said, because card fees can vary depending on the cardholder’s actions.

“For open-ended credit, you won’t know if you hit the 36 percent cap until the end of the month when you calculate the military APR,” Feddis said. Although the proposed rule excludes from the cap fees that are “reasonable and customary,” she said, “nobody’s going to know what that is until after someone decides to sue, or there’s an enforcement action.”

Card issuers might wind up designing some card agreements for military families, and excluding them from other cards, she said. Travel cards that charge steep annual fees and provide extensive services such as airport lounge access might become unavailable for military families, she said.

Existing 6 percent cap
Credit card issuers already have experience meeting special requirements for the military because of the Servicemembers Civil Relief Act, which caps the interest rate on loans incurred before soldiers before go on active duty. However, the 6 percent cap does not apply to loans taken on while a soldier is on active duty, and service members have to request the cap in writing.

The Defense Department noted that cards already have special consumer protections under the Credit CARD Act of 2009, which limits fees and rate hikes. However, leaving cards exempt from the military rules could create a loophole for predatory lenders, the department said. Active duty service members are full-time members of the armed services whether stationed abroad or in the U.S., including reserves on active duty.

The National Credit Union Administration said that proposed military rules could affect some of the payday alternative loans offered by about 500 federal credit unions. The alternative loans have interest rates of up to 28 percent and application fees as high as $20. The NCUA said it will work with Defense to protect service members “without limiting the affordable financial services credit unions can offer.”

The rule change wouldn’t outlaw credit unions’ payday alternatives, Dundon of the Center for Responsible Lending said, but would require them to lower their prices. “I think that’s appropriate,” she said. “If you’re getting charged more than 36 percent, there might be better alternatives.”

See related:Congress toughens loan protections for military

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