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Military Lending Act 'Loopholes' Are Costing Troops Money

Consumer watchdog wants rules strengthened and expanded to protect troops and their families from predatory lending.

Military families are especially vulnerable to predatory lending.

That’s why Congress passed the Military Lending Act (MLA) in 2006 – to protect servicemembers and their dependents from high-cost credit products. But the rules that resulted from the law are narrowly written and the Consumer Financial Protection Bureau (CFPB) says that creates “loopholes” that allow abusive practices to continue.

CFPB director Richard Cordray compares the current situation to “sending a soldier into battle with a flak jacket but no helmet.”

In a new report, the CFPB supports a Department of Defense (DOD) proposal to expand those rules to cover more consumer credit transactions marketed to military families.

However, the American Bankers Association (ABA) says any additional requirements on lending to servicemembers would have “adverse consequences” for members of the armed forces and military families. For example, the DOD proposal would make them ineligible for mainstream financial products including popular credit cards, ABA senior vice president Nessa Feddis told NBC News.

It's like “sending a soldier into battle with a flak jacket but no helmet.”

Financial institutions and rent-to-own retailers believe current regulations are working well and do not need to be revised – and they’ve told DOD that they oppose any rule changes. The American Bankers Association said any additional requirements on lending to servicemembers “would have adverse consequences for members of the armed forces and military families.”

What loopholes are we talking about?

Current rules cap the Military Annual Percentage Rate (MAPR) at 36 percent. The MAPR includes certain costs of credit, such as: interest, application and participation fees, as well as the cost of credit insurance or other add-on products.

But that limit only applies to three specific financial products: some payday loans, certain auto title loans and some tax refund anticipation loans.

Holly Petraeus, assistant director for servicemember affairs at the CFPB, told NBC News there are “a whole array of ways to evade the current restrictions” and lend to military members for far more than 36 percent.

For example, the interest cap on auto title loans only applies to those that run for six months or less. All the lender has to do to get around the limit is to make the term of the loan longer than that. Current rules only cover payday loans of up to $2,000. Any loan bigger than that and there’s no rate cap.

The DOD’s proposed rule changes would also put limits on other types of credit which are not currently covered at all, including deposit advance products offered by some financial institutions. They would also cover payday loans of any length and any amount, plus more auto title and installment loans.

Military debt can create serious problems

Deanna O’Neal, director of the Navy-Marine Corps Relief Society office in Iwakuni, Japan, says online payday loans have become a real problem and the economic fallout from these high-rate cash advances can be devastating to the troops.

“It’s tough because these kids are young and they don’t get any real financial education anymore,” she said.

O’Neal’s office has been working with Lance Corporal Jacob Eakle, a 19-year old Marine from Tennessee who ran up a staggering $18,000 in debt on emergency travel when his mother needed heart surgery.

After maxing out on personal loans, he turned to Internet payday lenders because they were easy to get. He had no idea the APR on some of these loans was as high as 500 percent, until he went to the Navy-Marine Corps Relief Society for help.

“These interest rates are way too high and it puts a big financial strain on everybody that they take advantage of,” he told NBC News from Japan.

Eakle said that mountain of debt he’s trying to pay off is making everything in his life much harder right now.

“A bad financial situation can be bad for their military readiness as well,” Petraeus points out. “If they’re weighed down by debt and all the challenges that come with that, they’re really not focusing on their military job 100 percent. And in the worst cases, it can lead to their security clearances being revoked.”

Herb Weisbaum is The ConsumerMan. Follow him on Facebook and Twitter or visit The ConsumerMan website.