Banking groups urge Pentagon to narrowly apply law

WASHINGTON (Reuters) - Banking trade groups want the Pentagon to narrowly apply a law that caps interest rates and fees on military personnel to payday loans only and not to other credit services, according to a letter obtained by Reuters on Friday.

Congress recently passed legislation that imposes a 36- percent cap on annual interest rates and fees that lenders can charge on credit cards and other loans provided to U.S. military personnel. The law, passed last year, was tucked into a Defense Department authorization bill.

"Our primary concern is that a broad application of the legislation could have the unfortunate impact of ... harming servicemen and women and their spouses and dependents by limiting their access to credit or increasing their credit costs," the letter said.

Banking lobbyists are worried the law essentially creates another regulator, the Pentagon, which will be required to work with federal banking regulators to implement it by October 2007.

The law has financial institutions scrambling to find ways to avoid being affected by the cap, which lobbyists say sets a worrisome precedent that could spill over into financial products outside the military.

The letter, dated January 5, is signed by five trade groups -- American Bankers Association, Association of Military Banks of America, Consumer Bankers Association, Independent Community Bankers of America and America's Community Bankers.

In the letter, which is addressed to David Chu, undersecretary for personnel and readiness, the banking groups urge the Pentagon to implement the law to apply to "payday loans," which can carry high fees for small denomination, short-term loans.

"What we're suggesting is if DOD takes a broad approach in implementing the (law), they could cut off a lot of very legitimate, very popular credit products that are helpful to the military," said Mark Tenhundfeld, director of regulatory policy at the ABA.

The "unintended consequences" could affect products currently being offered to military personnel, such as student and personal unsecured loans, mortgage refinancings, overdrafts and loans secured by 401(k) plans and insurance policies, the groups said in the letter.

The cap was established with much prodding from the Pentagon, which is concerned its services members are falling deep into debt -- a situation the Pentagon says distracts troops and hurts their ability to focus on their missions.

Officials have said the situation is also contributing to an increasing number of personal security clearance withdrawals and rejections within the U.S. military.

Attempts to reach Defense Department officials for comment on the letter were unsuccessful.