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CFPB Presses Defense Department on Lending Rule
Monday, January 5, 2015 6:40 AM

The Consumer Financial Protection Bureau is urging the Department of Defense to finalize a proposal meant to stop lenders from offering expensive credit to military personnel. On Dec. 29, CFPB released a letter to the Defense Department, as well as a study backing up its stance, that showed some payday lenders are charging rates higher than the 36 percent cap required under the Military Lending Act.

The Defense Department in September proposed changes to the law that would broaden its definition of credit to cover more payday-like products as well as auto title and installment loans. The CFPB strongly supported the proposal, which would expand credit protections to the military and family members, effectively bolstering the power of the CFPB.

"As one of the agencies responsible for protecting servicemembers by enforcing the MLA [Military Lending Act], we believe that the Department's proposal, if finalized, would strengthen the ability of the Bureau and other enforcement agencies to use our authorities to stop lenders from harming servicemembers in ways the law was intended to stop," said Hollister Petraeus, the CFPB's assistant director of the Office of Servicemember Affairs, in the comment later dated Dec. 26.

Cornerstone Credit Union League and five credit union associations, including CUNA, have called on the Defense Department to exempt CUs from proposed changes in the act.

The CFPB's study pointed to "loopholes" in the Military Lending Act. Specifically, the current regulation implementing the law does not cover loans with high interest rates that are structured as an open-end line of credit. The agency further listed nearly a dozen anecdotes in its comment letter and study of cases in which servicemembers were charged well above the cap for a deposit-advance loan, with one charged a 584% annual percentage rate by an online lender based offshore.

"The current rules under the Military Lending Act are akin to sending a soldier into battle with a flak jacket but no helmet. To give our troops full-cover protection, the rules need to be expanded," said CFPB Director Richard Cordray in a press release.

The CFPB is pressing the Defense Department to finish its proposal that would extend the Military Lending Act to cover more types of credit than the current rule which primarily covers shorter term payday loans, auto loans, and tax refunds within a certain timeframe and amount in some cases.