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DOD wants lenders to stop gouging troops on interest rates

U.S. marines participated in mountain warfare drills with South Korean marines in Pohang in March 2010. (Kim Jae-Hwan/AFP/Getty Images)

In a long-awaited move, the Obama administration proposed sweeping changes Friday to a law designed to protect service members and their families from predatory lending.

The decision to update the Military Lending Act arrives amid concerns that lenders are saddling service members with high-interest consumer loans by exploiting loopholes in the law. In response, the Defense Department has proposed extending a 36 percent cap on interest rates on loans to member of the military to include credit cards.

The proposal would also ban creditors from requiring troops to submit to arbitration or waive their rights under the Servicemembers Civil Relief Act, a federal law that extends legal and financial protections to military personnel.

“Excessive debt can jeopardize the personal readiness and financial well being of service members and their families,” Lt. Cmdr. Nate Christensen, a spokesman for the DOD, said in an email. “Personal financial readiness of service members and their families must be maintained to sustain mission readiness.”

The Military Lending Act was enacted in 2006 to curb the proliferation of high-interest lenders near military bases. It limits the interest rate that lenders can charge active-duty military members and their families on short-term loans secured by car titles or a person’s paycheck, so-called payday loans.

“High-cost lenders found that they could evade the 36 percent rate cap by making installment loans, making the term of the loan flexible or adding one day to the definition in the rules,” said Lauren Saunders, associate director at the National Consumer Law Center.

Because of such efforts to circumvent the law, the DOD has proposed expanding the definition of “consumer credit” in the Act to include all auto title loans, installment loans and car loans. But broadening the scope of the law has riled some in the financial services industry.

“DoD has not published any evidence of problems with traditional installment lending,” said Chris Stinebert, president and chief executive of American Financial Services Association, a trade group. “Before subjecting an entire industry to restrictive regulation, we believe that more emphasis should be placed on promoting access to affordable credit for servicemembers.”

Advocacy groups and lawmakers have long called for tougher consumer finance regulations to protect troops from onerous lending terms. Congress amended the act last year to expand the definition of borrowers covered by the law.

The issue gained further attention when the Consumer Financial Protection Bureau began going after companies for violating the existing law. Last year, the bureau reached a $19 million settlement with Cash America, one of the country’s largest payday lenders, for, in part, charging active-duty service members and their families more than 36 percent interest on payday loans.

“We have seen firsthand how lenders use loopholes in the rule to prey on members of the military. They lurk right outside of military bases, offering loans that fall just beyond the parameters of the current rule,” CFPB Director Richard Cordray said in a statement Friday.

The proposal is available in the Federal Registar for public comment.