Sweeping changes proposed in military lending program

The so-called loopholes in the Military Lending Act that have left hundreds of thousands of military service members across the country vulnerable to potentially predatory loans, could be facing changes in 2015.

According to a Sept. 26 New York Times report, the Obama administration and the U.S. Defense Department are proposing sweeping changes to a seven-year-old federal law that was intended to shield service members and their families from high-cost loans tied to their paychecks. The move reflects the Defense Department’s growing recognition that lenders have exploited loopholes in the law.

The proposed updates to the law would extend a 36 percent interest rate cap on short-term loans to cover a much broader swath of products — from installment loans to credit cards — that have proliferated since the law was passed by the U.S. Congress. The proposal also requires that creditors enhance their disclosures to military members, mandating that the lenders tell military members that they should first try to find alternatives to the costly forms of credit. Creditors could also no longer require service members to agree to arbitration, a concession that would strip borrowers of their rights to fight in court.

“We have seen firsthand how lenders use loopholes in the rule to prey on members of the military,” Richard Cordray, director of the Consumer Financial Protection Bureau, said in a statement reported by the New York Times. “They lurk right outside of military bases, offering loans that fall just beyond the parameters of the current rule.”

Congress approved the Military Lending Act in 2006 on concerns that payday lenders, which offer double-digit interest loans tied to a borrower’s next paycheck, were preying on military members, imperiling their finances and even pushing them into foreclosure. The law set a 36 percent interest rate cap on a range of high-cost loan products, however, the protections applied to a narrow sliver of loans covering only loans for up to $2,000 that lasted for 91 days or fewer.