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Pentagon, Congress take another stab at abusive lending practices targeted at military families

Lawmakers and the Department of Defense are moving to close loopholes in a 5-year-old law that has otherwise successfully stopped some lenders from fleecing military families with exorbitant interest rates on short-term loans.

The Military Lending Act capped interest rates at 36 percent and banned loans that used bank accounts, vehicles or the paychecks of service members as security. But it also adopted somewhat narrow rules, limiting its coverage to payday loans with terms of 91 days or less and to “closed end” credit with fixed terms, for example.

While many payday loan storefronts vanished in areas around military bases and fewer military families sought financial assistance due to such loans, some abusive practices continued. Some auto-title and Internet payday lenders created “open ended” loan products with no end date and interest that could top 500 percent, according to a May report by the Consumer Federation of America

Related: Feds move to help out underwater military homeowners

The Senate is now holding hearings on new restrictions for lenders that market to military families. The rules may be included in the 2013 authorization measure that guides military spending.

“I hear from financial counselors on the installations about the prevalence of payday-like products that are specifically marketed to military families – often with patriotic-sounding names and the American flags on the website to match, but with a sky-high interest rate,” Holly Petraeus, who oversees services member affairs at the Consumer Financial Protection Bureau, told the Senate banking committee on Tuesday.

Such abusive lending targeted at military families hits at the heart of the Pentagon’s effort to educate troops about good financial practices because troops with money problems can be distracted on the battlefield or in their other duties.

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“Financial readiness of service members and their families is essential to their well-being and their ability to contribute to the mission,” Col. Paul Kantwill, director of the Office of Legal Policy, testified on Tuesday.

While Kantwill reported that the majority of previous abuses have been stamped out, he said the Defense Department is taking a hard look at these other high-cost loans not covered by the regulations and is concerned about some overdraft protection programs as well.

However, the American Financial Services Association, which represents non-bank lenders, fears the stricter regulations will be extended to other groups, such as police officers or firefighters.

“They’ll get a foothold,” Bill Himpler, executive director the trade group, told Bloomberg news service. “If they say it’s good for the military, why is it not good for first responders.”

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