A Defense Department proposal to strengthen lending protections for troops could end up denying them access to some affordable alternatives to predatory loans, a top credit union regulatory official said Tuesday.
The National Credit Union Administration supports the intent of DoD's proposal to expand the scope of the Military Lending Act, which protects service members and their family members from predatory lending, said Debbie Matz, NCUA's chairman of the board.
"However, we are asking that the rule be implemented without the unintended consequence of outlawing affordable credit union loans to the very service members the law was intended to protect," Matz said at a meeting of the Defense Credit Union Council's Overseas Subcouncil.
NCUA is the independent federal agency that regulates, charters and supervises federal credit unions.
"We have done the math and found that when fees are included, many credit unions' short-term loans would exceed the proposed 36 percent military [annual percentage rate] limit" set by the Military Lending Act, Matz said.
Defense officials have proposed a broad expansion of their previous rules implementing the Military Lending Act of 2006, which limits to 36 percent the interest rate on certain forms of credit that can be charged to service members and their dependents.
DoD's current rules cover only payday loans, vehicle title loans and refund anticipation loans. While the law has had an impact in curbing predatory loans to military borrowers, some lenders have modified their products to evade the DoD rules.
The proposed new rules would apply to most forms of credit, including credit cards, deposit advance loans, installment loans and unsecured open-end lines of credit. For credit cards, creditors could exclude from the charges in the annual percentage rate any bona fide fees that are reasonable and usual.
The protections do not apply to mortgages or purchase-money loans — for example, vehicle loans.
Matz said DoD's expanded rule would adversely affect payday alternative loans that have been set up by more than 500 federal credit unions, including Pentagon Federal Credit Union and some other military-related credit unions.
In a letter to DoD, she asked that DoD exempt from the proposed expanded rule those payday alternative loans that comply with NCUA's regulations.
Matz noted that unlike the annual percentage rate charged to people outside the military community, the military APR includes fees that normally are exempt under the regulation that implements the Truth in Lending Act.
"Thus, the Defense Department's proposed rule could cut off military members' access to [payday alternative loans] or similar loans" offered to service members and their families, she said.
In 2010, the NCUA established a regulatory framework for payday alternative loans, with an annual percentage rate of up to 28 percent and an application fee of no more than $20 to cover processing costs.
The average payday alternative loan is $630, with a median interest rate of 24.6 percent. The average total cost for a 30-day payday alternative loan is $33, Matz said.
On this kind of short-term loan, the addition of the application fee pushes the effective military APR on the average payday alternative loan to 63 percent, Matz noted.