Proposed Military Lending Act Rules Are An Improvement, But Loopholes Remain That Expose Service Members To Abusive Fees And "Sham" Secured Loans With Sky High Interest Rates
A.G. Kilmartin: We Must Protect Service Members From Financial Abuse While They Protect Our Country
Attorney General Peter F. Kilmartin urged the U.S. Department of Defense (DoD) to strengthen proposed revisions to regulations implementing the federal Military Lending Act (MLA). In a joint letter to DoD, Attorney General Kilmartin along with 21 other state attorneys general praised the Department for closing some loopholes in the current rules, while highlighting weaknesses in the revised regulations that could leave service members exposed to common abusive lending practices.
The MLA was intended to shield service members from predatory lending practices by capping interest rates and fees on loans to service members, and providing other important protections. However, since rules implementing the Act were adopted in 2007, some unscrupulous lenders have changed tactics to avoid complying with the law. In response, on September 29, 2014, the DoD published new proposed regulations aimed at providing more comprehensive protections for service members.
"Our service members put their lives on the line for us every day," said Attorney General Peter F. Kilmartin. "It is particularly abhorrent that some would try to prey upon our military. While they are protecting our nation, service members should not have to worry about protecting themselves from predatory lenders."
The attorneys general cite two weaknesses in the proposed MLA regulations: 1) an overly broad exemption for fees that may be charged in excess of the MLA's 36% interest rate cap; and 2) a failure to regulate sham secured loans that are structured to evade MLA protections.
With regard to fees, the MLA imposes a 36% cap on the Military Annual Percentage Rate (MAPR) for loans to service members. Under current regulations, the MAPR includes all fees that are required to be paid as a condition of the credit. The new regulations exempt from the MAPR calculation any "bona fide fees" if they are "reasonable and customary." The attorneys general point out that the 36% cap already far exceeds national averages for APR on both fixed and variable rate credit cards, and that new fee exemption will "open a wide door through which abusive fees of creative lenders may pass."
The attorneys general also raised concerns about the failure of the new rules to tighten the exemption for secured loans. Such loans are exempt from key MLA protections, but this exemption has been widely abused. The attorneys general have found that predatory lenders peddle consumer loans that are nominally secured by collateral, but that in practice are disingenuous vehicles for "abusive practices Congress sought to ban." For example, the MLA specifically prohibits cash loans backed by allotments from the borrower's paycheck and access to the borrower's checking account. Some lenders evade this prohibition by making loans with a security interest in a consumer item that is worth far less than the amount of the loan. The attorneys general write that "these lenders' recourse for a $3,000 loan is not the $650 TV securing it, but the allotments and checking account sweeps that are otherwise made illegal by the MLA." The letter also notes that service members are particularly vulnerable because unpaid debts can affect their security clearance, and potentially their military career.
The threat of predatory loans cloaked as secured loans is not a hypothetical one. The attorneys general cite the matter of SmartBuy/Rome Finance. In that case, vendors lured service members "to purchase household electronics and other items at 300% markups through predatory financing" at effective rates of interest far exceeding the 36% MLA cap. The loans were "almost exclusively backed by allotment payments and checking account access—practices that are explicitly banned by the MLA. But, because the Rome Finance agreements were nominally 'secured' they arguably would not have been covered by the existing MLA regulations nor would they be by the Department's proposed amendments." In July the federal Consumer Financial Protection Bureau and 13 states secured a settlement liquidating Rome Finance and its successor corporations, and providing more than $92 million in debt relief to more than 23,300 affected United States service members worldwide. In their letter today, the attorneys general urged the DoD to clarify that the exemption for secured loans only applies "where there is a valid and enforceable security interest (bearing a reasonable relationship in terms of value)," and not to sham transactions that are structured to evade MLA rules, like those used by SmartBuy/Rome Finance.
While urging improvements to the regulations, the attorneys general praised the DoD for proposing rules that "make strides in closing loopholes and accomplishing the intent of the Military Lending Act." For example, the new rules would extend protections that currently cover fixed term loans to also include open ended loans. The letter was signed by the attorneys general of Arkansas, California, Connecticut, Delaware, Florida, Hawaii, Illinois, Indiana, Iowa, Kentucky, Maine, Maryland, Massachusetts, Minnesota, New Mexico, New York, North Carolina, Pennsylvania, Rhode Island, Tennessee, Vermont and Washington.