• Pentagon Expected to Expand Applicability of the Military Lending Act
  • June 16, 2014 | Author: George A. LeMaistre
  • Law Firm: Jones Walker LLP - Mobile Office
  • Pentagon officials are preparing revised regulations to expand the consumer protections provided to military personnel and their dependents under the Military Lending Act ("MLA").

    The Department of Defense issued a report in April, based in part upon surveys that the Department conducted of active-duty members of the armed services, and financial counselors and legal assistance officers who administer financial-education and credit-counseling programs that the Department provides to all service personnel. The surveys and the resulting report were prepared at the direction of the Senate and House conferees on the National Defense Authorization Act for fiscal year 2013.

    The surveys were designed to gather information on the effectiveness of the MLA, 10 U.S.C. § 987, and its existing regulations, 32 C.F.R. Part 232, in enabling servicemen and women to avoid what the conferees termed the "continuing, evolving predatory lending practices targeting service members and their families." The report is based, in addition to the survey data, on submissions received by the Department in response to an Advance Notice of Proposed Rulemaking published in the summer of 2013, soliciting public comment on whether maintaining the effectiveness of the MLA requires changes in its implementing regulation, such as expanding the definitions of the types of consumer credit transactions that the Act covers. Administrative enforcement for violations of the Act or its regulations is committed to the federal financial regulatory agencies, where the alleged violator is regulated by any such agency, and otherwise to the Consumer Financial Protection Bureau.

    According to the report, the Department received comments from more than a dozen bank, credit union, and consumer-lending trade associations, several individual lenders, and 45 consumer-advocacy groups. Submissions also were received from 14 State Attorneys General, three State Departments of Veterans Affairs, the association that represents 49 State consumer-credit regulators, and members of both houses of Congress.

    The comments submitted by the lenders' associations generally supported the current regulation, the report says, "and warned against the potential for unintended consequences if the definitions are extended." All of the consumer groups advocated expanding the scope of credit transactions subject to the MLA, and all but one of the groups recommended bringing under the Act all credit transactions that are subject to the federal Truth-in-Lending Act. Similar expansions generally were advocated by the State officials and Members of Congress who submitted comments.

    Among the provisions of the MLA is a prohibition on extensions of credit that have an annual percentage rate in excess of 36 percent. Since 2007, when the MLA and its regulation became effective, the report says, many lenders that offer credit to military personnel, and their families, have restructured their credit offerings in ways that have had the effect of excluding them from the Act's coverage by, for example, making the term of the credit longer than 91 days (or 181 days in the case of vehicle title loans), or structuring their loans as revolving credit. 

    The Department's report also cites a study by the Consumer Federation of America that found that 13 states authorize the making of vehicle title loans that are not subject to the MLA, and that 11 states allow payday loans that aren't covered by the Act. The same study estimates that about 54 percent of military service members have access to payday loans or vehicle title loans that are not covered by the MLA.

    According to the report, in addition to being saddled with the costs of APRs in excess of 36 percent, service members (or their dependents) who incur debt that is not subject to the MLA often find that they are obligated for other additional costs, such as origination fees, monthly maintenance fees, mandatory credit insurance, and other ancillary costs, for which they frequently receive little benefit.

    All of these circumstances, the report says, led the Department to conclude that the growing ability of lenders to provide credit to military personnel that is not subject to the MLA "is becoming more evident and of greater concern," and that "without revising the definitions of credit in the MLA to encompass installment and open end credit, the MLA will lose its effectiveness with respect to providing a limit on any form of credit identified in the regulation."

    While the Department considered strengthening the regulation by formulating further definitions of specific credit transactions that are subject to the Act, the report says it concluded that, given the constant flux in the marketplace, efforts to enumerate specific transactions are unlikely to be effective, or to remain so for very long.

    Thus, the report says, "Specific definitions of problematic credit no longer function well in the current marketplace." As a result, the Department has chosen instead to employ "a comprehensive approach in its redrafting of the implementing regulation for the MLA." The report provides no indication of when the revised regulation is expected to be released.