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Why Military Members Get More Protection From High-Cost Credit

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This is the second article in a series devoted to consumer issues for National Consumer Protection Week, March 3-8.

Military Members Get Better Protection From High-Cost CreditIn a perfect world, unscrupulous creditors couldn’t take advantage of anyone, especially those who serve our country. There would also be a fool-proof law that protects military members and their families from the abuses of high-risk credit products like payday and auto title loans.

Unfortunately, our world is one where service members are among the most common targets for predatory lenders, some of whom have found and exploited major loopholes in the now six-year-old Military Lending Act (MLA).

The good news is recent amendments should make it easier to crack down on companies that exploit veterans with exorbitant interest rates and onerous security requirements.

In January, President Obama signed the latest version of the National Defense Authorization Act, which in part expands the government’s power to enforce provisions of the MLA. The original legislation instituted a rate cap of 36 percent for certain loan types; prohibited loans from being secured with checks, debits and car titles; and provided other important consumer credit protections.

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But it also relegated watchdog agencies to an oversight role. Now, both the Consumer Financial Protection Bureau and the Federal Trade Commission have the power to penalize lenders and take action against MLA violations. The new amendments ensure that military members are protected by the same federal regulators that enforce the expansive Truth in Lending Act.

Free Tool: Credit Report CardOther important updates:

  • The CFPB was added to the list of agencies that the Defense Department must consult every two years regarding the effectiveness of MLA rules.
  • The Defense Department will conduct a study to identify new forms of high-risk credit products that are hurting military borrowers.
  • A provision that requires lenders to follow the credit laws of the state where the military member receives the loan. Some lenders skirted state laws by contending they only gave loans to non-residents at military installations nationwide.
  • A standard definition of “covered military dependents” to ensure that MLA protections extend to service members and their children.

“These amendments are a positive step forward and will ensure that financial protections for service members, including the 36 percent rate cap, are adequately enforced,” said Jean Ann Fox, senior advisor for financial services at the Consumer Federation of America, an association of nonprofit consumer groups. “We look forward to working with the Department of Defense as it reviews and regulates credit options available to service members to ensure that the financial protections envisioned by Congress are fairly and evenly applied.”

[Related Article: When Debt Collectors Go After American War Heroes]

The Consumer Federation of America was instrumental in helping to spur regulatory updates. The organization released a report last summer that highlighted the MLA’s lingering loopholes and their serious consequences for service members.

“Lenders have exploited loopholes in the definitions of covered credit, such as styling a payday or car title loan as open-end credit or setting a loan term slightly longer than the definitions cover, to make high-cost loans to service members,” the report reads. “Exploiting definitional loopholes has been most problematic with an online payday lender and in states where high cost loans are not prohibited under state law.”

Military members can be more susceptible to risky short-term lending than civilians. A 2010 survey found that nearly a third of enlisted personnel or junior non-commissioned officers had turned to car title loans, payday loans and other risky forms of borrowing in the last five years. More than a third had difficulties covering monthly expenses and bills.

Personal finances are routinely among the top three sources of stress for service members, ahead of even deployments and war.

“We must all recognize financial readiness is mission readiness,” Army Maj. Gen. Michael Garrett wrote this month. “Many soldiers, especially first-termers, have never been taught how to create or manage a budget, what a variable percentage rate is or the true cost of credit. We have a responsibility to be as prepared as possible to defend this nation.”

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