New Rule Expands Military Lending Act

Today, the Department of Defense issued a final rule expanding the scope of the Military Lending Act (MLA).  The MLA was enacted in 2006 and was implemented by DOD rules in 2007.  It prohibited contracting with service members for three types of consumer credit products:  1) closed end payday loans for $2000 or less with a term of 91 or fewer days; 2) closed end auto title loans for a term of 181 days or less; and 3) closed-end tax refund anticipation loans.

The new rule, which will become effective in October 2015, expands the scope of the MLA:

• Imposes a 36% interest rate cap (calculated as the Military Annual Percentage Rate or MAPR) including all interest and fees associated with a loan;
• Prohibits creditors from imposing mandatory arbitration terms on service member borrowers, and prohibits terms that require service members to waive certain other rights;
• Prohibits loans to service members that provide a payroll allotment as a condition for obtaining credit, permit rollover of a payday loan, or use of a security in the form of a post-dated check  or a car title (with some exceptions);
• Expands the definition of "credit" covered by the MLA to include any closed or open-end loan, including car loans but excluding loans secured by real estate;
• Modifies the provisions relating to the optional mechanism a creditor can use to assess whether a consumer is a "covered borrower" under the MLA;
• Modifies disclosures a creditor must provide to a covered borrower;
• Implements the MLA's enforcement provisions.

The DOD consulted (as the MLA required) with a host of federal agencies including the CFPB.  CFPB Director Richard Cordray said "The CFPB strongly supports the Department's efforts to strengthen consumer protections for our nation's military families."  In December 2014, the CFPB issued a report asserting that lenders were exploiting "loopholes" in the MLA.  The CFPB report took aim at "deposit advance products" (see April 2013 CFPB whitepaper,  OCC's supervisory guidance and Federal Reserve Board on these products).  A "deposit advance product" is a loan that a lender makes to a borrower whose deposit account reflects recurring direct deposits.  The borrower promises to repay the principal plus a fee from the next direct deposit. The underwriting basis for the loan is cash flow (the recurring direct deposit) and not an "affordability" analysis of the borrower's ability to repay the loan and also meet other recurring financial obligations.  

In November 2013, the OCC and FDIC issued guidance governing deposit advance products that applied to banks subject to their regulation.  By early 2014,  banks abandoned the business citing the regulations.  The guidance warned banks that they must to take into account the borrower's ability to pay, and that bank examiners would ensure that bank's deposit advance programs comply.

As part of the comment process on the  DOD's rule, the American Banker's Association (ABA)  urged the DOD not to rely on the CFPB's December 2014 study (the Study) and accompanying comment letter.   1) the CFPB did not apply to the Study the "evidence-based" standards it must apply to its own rule making process under the Dodd-Frank Act; and 2) the Study did not support the conclusion that service members are more vulnerable to deposit advance products than the general public.  (Footnote 11 of the Study makes clear that the differential impact identified in the Study was not evaluated against other explanatory variables that might eliminate statistical significance, and that the differential "does not mean that being a servicemember makes a person more likely to use deposit advance products.").  The ABA further noted that the CFPB has not yet issued its own final rules on deposit advance products. (In March 2015, the CFPB released an outline for potential regulation of the payday lending industry).  

It is clear that Americans have a love/hate relationship with payday loans.  According to a study by Pew, 12 million American's spend about $17 billion on payday loans each year.  The DOD rule is a victory for consumer groups who consider deposit advance products to be "predatory" and oppressive.  It's not clear whether the rule is a victory for service members, who will be excluded from credit products that are available to all other Americans.