Bloomberg News

U.S. Defense Department Plans Tougher Rules on Small Loans

June 26, 2012

The U.S. Department of Defense plans to strengthen rules designed to curb abusive lending to servicemembers as Congress considers changes to a 2006 law that regulates small loans, according to a senior military officer.

The Senate Armed Services Committee approved amendments to the Military Lending Act on June 6 as part of its annual review of defense policy, including one that would tighten the definition of payday loan to cover other high-interest products. The changes would also require the Pentagon to study and regulate installment loans aimed at members of the military.

“The legislation has been extremely effective in stamping out abuses involving these types of credit,” Colonel Paul Kantwill, director of legal policy in the Department of Defense’s Office of the Undersecretary for Personnel and Readiness, said in written testimony to the Senate Banking Committee today.

Kantwill said in his testimony that the department may publish advance notices of proposed rulemaking once it is clear what changes “may be included” in the final legislation.

Troop Readiness

Congress passed the law in response to complaints from the Pentagon that so-called payday loans were often harmful for servicemembers and affected troop readiness. The law effectively banned payday lending to members of the military by limiting the loans to an interest rate of 36 percent.

Payday loans are a form of short-term, high interest credit in which borrowers leave a post-dated check in return for a loan that is due a few weeks later. Annual interest rates can rise as high as 512 percent, according to the Consumer Financial Protection Bureau.

Advocacy groups, including the Consumer Federation of America, have argued that some lenders have evaded the law by redefining their products without lowering the interest rates.

“I hear from financial counselors on the installations about the prevalence of payday-like products that are specifically marketed to military families -- often with patriotic-sounding names and the American flags on the website to match, but with a sky-high interest rate,” Hollister “Holly” Petraeus, assistant director of the consumer bureau for servicemember affairs, said in written testimony. “And the Internet is full of ‘military loans,’ some outright scams and others with very high interest rates.”

Consumer Groups

Consumer and defense personnel groups, including the Consumer Federation and the Military Officers Association of America, wrote senators yesterday supporting the proposed changes.

“We have a compact with servicemembers and their families to protect them from abuses that undermine their welfare and morale,” the groups said in the letter.

Bill Himpler, executive vice president of the American Financial Services Association, said the lending industry fears consumer advocates will push to ban lending to other groups like fire fighters or police officers if further restrictions pass.

“They’ll get a foothold,” Himpler said in an interview. “If they say it’s good for the military, why is it not good for first responders?”

Himpler, whose group represents non-bank lenders, said further restrictions will limit the amount of credit available to servicemembers who may not be able to borrow from a traditional bank. Senator Jack Reed, who pushed for the amendments approved by the Armed Services Committee, dismissed the objection at the hearing.

“In terms of credit availability, particularly in this market, when people are, you know, charging a 36 percent interest rate, I don’t think we’re talking about losing good access to credit,” said Reed, a Rhode Island Democrat. “You’re looking about being, sort of, taken for a ride.”

To contact the reporter on this story: Emma Fidel in Washington at efidel@bloomberg.net; Carter Dougherty in Washington at cdougherty6@bloomberg.net

To contact the editor responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net


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