President Obama on Tuesday announced that the Defense Department will expand existing credit protections for troops and families against predatory lenders.
Speaking to the 116th national convention of the Veterans of Foreign Wars, Obama told attendees that the new rules are part of the ongoing fight "to give our troops ... every chance to enjoy the American Dream."
He noted that there is an existing law, the Military Lending Act of 2006, designed to protect troops and their families against "unscrupulous predatory lenders."
"But ... some of the worst abusers, like payday lenders, are exploiting loopholes to trap our troops in a vicious cycle of crushing debt," Obama said. "The Defense Department is closing these loopholes so we can protect our men and women in uniform from predatory lenders. It is the right thing to do."
In a media call with reporters the night before Obama's speech, administration officials said implementation of the new rules will begin Oct. 1 but will not take effect for troops and families for a year or more. New credit card protections, for example, will not kick in until Oct. 1, 2017.
But when all the new rules are finally in place, they will close loopholes in the original regulations that spun out of the 2006 law, which limited the annual interest rates that service members could be charged to 36 percent.
However, the law gave DoD broad authority to define the types of loans covered, with the exception of mortgages or purchase-money loans such as vehicle loans. And in its initial implementation of the law in 2007, DoD placed narrow limits on the types of credit covered: payday loans, vehicle title loans and refund anticipation loans.
Consumer advocates have routinely criticized that decision ever since.
The new rules broaden the definition of consumer credit covered under the law to also include deposit advance loans, installment loans and credit cards extended to active-duty service members and their families.
Defense officials have realized since the initial rules were implemented that they needed to be expanded, said Brad Carson, acting under secretary of defense for personnel and readiness, in a press call with reporters.
"This is an historic event for us," Carson said, adding that the new rules will enhance military readiness through the added protections for troops and families.
For too long, lenders have put an unacceptable strain on military families though high-cost loans, said Jeff Zients, White House National Economic Council Director, who added that the new rules will give troops and families "critical protections."
In crafting the updated rules, defense officials have worked with a number of federal agencies, including the Consumer Financial Protection Bureau, Federal Trade Commission, Federal Deposit Insurance Corporation, National Credit Union Administration and the Treasury Department. Extensive public comment before and after proposing the rules also was taken into account.
Some banks and credit unions have expressed concern that the proposed rules would block some affordable alternatives to predatory loans. Debbie Matz, chairman of the board of the National Credit Union Administration, said the annual percentage rate under the Military Lending Act includes fees that are normally exempt from the APR charged to those outside the military community.
For example, on many small, short-term loans, an application fee of $20 to cover processing costs, added to an interest rate of 24.6 percent, would push the effective military APR above 36 percent.
Carson said the final rules provide some limited exemptions for small short-term loans. "This way, service members will have a variety of options," he said.
Addressing the problems with loopholes in the initial DoD rules has been a "sustained, long-term effort" for DoD, said Holly Petraeus, assistant director of Servicemember Affairs for the Consumer Financial Protection Bureau.
Petraeus noted that while the Military Lending Act has had a beneficial impact for troops and their families, some predatory lenders have taken advantage of loopholes.
She gave an example of one military loan with an APR of 300 percent, made possible because the loan was technically longer than what was covered under the DoD regulations.
Such lenders often use names that sound like they are affiliated with the military, and use military imagery to target those in the military community. Petraeus said financial counselors have told her stories of many service members who are struggling under the weight of high-interest loans.
A number of lenders have said troops and families need access to these high-cost loans as an alternative, and for convenience, Petraeus said, but added that when she sees 20 "fast cash" businesses outside the gates of a military base, "that's not a convenience — that's a problem."