Military households are like the rest of Americans. From time to time, they need help making ends meet. Responsible lenders help satisfy that need. But if the Senate doesn't act now, proposed regulations to expand the Military Lending Act could unfairly prevent these lenders from serving troops and their families in the future.
Last fall, the Department of Defense proposed new regulations that would expand the Military Lending Act to cover a broader range of consumer financial services, including credit cards, unsecured lines of credit and installment loans.
No one disputes that the MLA offers important financial protections by restricting payday loans, vehicle title loans and tax refund anticipation loans that tend to trap consumers in a cycle of debt. There is great concern, however, over the proposal to bring many more financial products under the extremely restrictive scope of the MLA rule.
The unintended consequence of such an expansion will be to severely restrict — if not altogether eliminate — access to safe, affordable credit options for military personnel and their families. Congress should insist that the Pentagon study the effects of its rule on access to credit for military households.
Even federal regulators have expressed concern about how the regulation may impede the ability of reputable lenders to meet the borrowing needs of their customers. As reported by Military Times, National Credit Union Administration chair Debbie Matz told a recent meeting of the Defense Credit Union Council that the new rule should be implemented "without the unintended consequence of outlawing affordable credit union loans to the very service members the law was intended to protect."
Indeed, one form of lending that would be caught in the MLA's broader net — the traditional installment loan — is widely regarded as a safe, affordable method for consumers to meet their financial obligations and build their credit. These small-dollar loans (often called signature loans) are fixed-rate, fully amortizing credit repaid in equal monthly installments. They are always underwritten based on the borrower's ability to repay. Payment performance is reported to the credit bureaus, allowing responsible borrowers to improve their credit history. With its proposed limitations, the DoD seems to have forgotten that in the past it has recognized installment loans as a favorable form of credit.
Another problem with the Pentagon's rule is that it puts the burden of identifying members of the military and their dependents on lenders, rather than relying upon applicants to identify themselves. Every application for consumer credit — some 300 million per year — would have to be checked against a database widely known to be unreliable, a requirement that will result in delays and hardships for military and civilian borrowers alike.
Now, the Senate has the opportunity to include language in its version of the bill providing a final check to ensure the proposed expansion doesn't hurt the very people it is intended to protect.
The Senate began considering its version of the NDAA on June 3. Our hope is that, as part of this process, senators will insert language requiring the DoD to study the effects of a rule that will most certainly make it harder for military families to obtain affordable credit. That's right — a mere requirement to look before you leap.
No one wants to make it harder for members of the military to obtain credit to meet their obligations or take care of emergencies, but that is exactly what will happen if the proposed MLA rule takes effect.
With final checks included in both versions of the bills going to conference, the likelihood is high that the Pentagon will have to slow down and make sure they've got this right before moving forward.
Bill Himpler is the executive vice president of the American Financial Services Association, the national trade association for the consumer credit industry. ASFA's mission is to promote responsible, ethical lending to responsible, informed borrowers and to improve and protect consumer's access to credit.