Troops and their families will have stronger protections against predatory lenders starting Oct. 3 — and some in the banking industry have expressed concern that stricter rules will cause some loan options to disappear.
The 36 percent interest rate cap now applies to all types of consumer credit, such as overdraft lines of credit, deposit advance loans and installment loans, to name a few examples. Lenders have to follow stricter rules for active-duty members and their dependents than they do for civilian borrowers.
The rules don't apply to mortgage loans or purchase money loans, such as vehicle loans.
Defense Department officials announced the rules a year ago, but the enforcement doesn't start until Oct. 3, as lenders were given a year to get their systems in place. Federal regulators of credit union and banking regulators, along with the Consumer Financial Protection Bureau, will enforce the new regulations.
Credit cards are covered under the new regulations, too, but those provisions won't take effect until October 2017.
"DoD was right to improve those rules. The market has changed. These rules will go a long way to eliminate the 300- to 400-percent interest loans," said Tom Feltner, director of financial services for Consumer Federation of America.
"We'll watch the marketplace for future evasions, but we think this rule provides a comprehensive framework to prevent high-cost lenders from abuses," he said.
The Military Lending Act of 2006 gave DoD broad authority to define the types of loans covered by the 36-percent interest rate cap, with the exception of mortgages or purchase-money loans. In its initial implementation of the law in 2007, DoD put narrow limits on the types of credit covered: payday loans, vehicle title loans and refund anticipation loans.
Consumer advocates complained that unscrupulous lenders were skirting these narrow rules and morphing their products to be able to charge service members and their families high interest rates — such as tweaking payday loan terms, for example, so they would fall within the rules. So for the last several years, DoD has been working to change its rules.
In a financial emergency, service members and dependents are better off turning to their military relief society than to lenders such as online payday lenders, who offered expensive loans that sometimes caused a downward debt spiral. The relief societies offer grants and interest-free loans to eligible troops and have separate small-dollar loan programs designed to provide short-term loans quickly to service members. These loans are not affected by the new DoD rules.
What differences will service members and their families see?
Status checks. Lenders will independently check a borrower's military member/family member status. In the nine years since implementation of the narrower rules, some borrowers were not being truthful about their military status in order to get access to these quick, but often expensive, loans.
Now, lenders will either check the Defense Department's Defense Manpower Data Center database or one of the nationwide credit reporting agencies, which will also have access to the DoD database.
The information on a borrower's military status is not a permanent part of the borrower's credit report, according to Lori Dietrich, director of product management for Experian, one of the national credit reporting agencies. Lenders will request the information when asking for a credit report, or they can also ask for the information without asking for a credit report. Experian will charge a "nominal fee" to lenders for pulling the information, according to Dietrich. Whether that cost is passed on to the borrower depends on the lender.
Lender disclosures. Lenders must provide written and oral disclosures to the borrower about the Military APR and the payment obligations.
Fewer options — maybe.
Generally, most loans will be under that Military APR of 36 percent. But troops and families might not be eligible for certain loans now — if all the fees bring the Military APR calculation to more than 36 percent. The Military APR calculation has to include application fees and certain other fees that are legal and charged to other borrowers, but aren’t required to be included in the calculation of other non-military borrowers’ APRs under the Truth in Lending Act. When there are these fees, the Military APR may be higher than the regular APR.
The costs and effects will vary, depending on the financial institution. "These are good protections for the service member. [The new rules] have had minimal impacts on the products we offer," said Tom Kientz, chief operating officer of Armed Forces Bank, which operates 48 branches on 25 military installations in 15 states.
"I wouldn't be surprised if it led more service members back to traditional banks," he said, since the high-cost lenders will no longer be available for troops.
But some banks have been eliminating some products, or have decided not to offer certain loans, to these covered military borrowers, said Nessa Feddis, vice president and senior counsel for the American Bankers Association's Center for Regulatory Compliance. Small-dollar loans will be difficult for banks to offer, she said. One large bank, and some others, have decided to eliminate car refinancing loans, she said.
Some have expressed concerns about unintended consequences from rules that are based on good intentions. The full effects remain to be seen, said Steven Lepper, a retired Air Force major general who is president and CEO of the Association of Military Banks of America, which represents banks that have branches on military bases.
"What I'm hoping as a veteran, and as a person who represents military banks, is that an effect of the [new rules] will not be to reduce lending to military members," he said.
Having seen the effects of financial products on service members during his career, Lepper said, "I'm really passionate about providing military members responsible sources of lending. You can't deny that military members often will need to borrow money. If they borrow from payday lenders, they only get themselves into deeper holes. Banks and credit unions and other responsible lending institutions are there to help military members deal responsibly with their debt.
"They are not the institutions these rules were meant to constrain, yet they are within the scope of these rules. So they have to comply, and they will."
The rules could require processes that are so complicated and expensive, he said, that some financial institutions can no longer provide these responsible products to military members.
"We don't have examples of any financial institution refusing to provide a product to a military member, but that's something we certainly need to watch out for," Lepper said.
DoD officials have been receptive to the input from financial institutions while balancing the need to protect service members from predatory lenders with the need for service members to continue to have access to responsible, low-cost loans, Lepper said.
"DoD is as concerned as we are that responsible lenders will continue to lend to military members and their families," he said.
The possible unintended consequences of the new rules have been at the center of concerns of many lenders all along, said Katie Savant, government relations issue strategist for the National Military Family Association. "It’s one of those things that we’ll have to wait and see what happens," she said.
But she hopes that initially, troops and families won’t see much of an impact as the new rules are enforced.
"We hope they aren’t using these types of high-cost products," she said.