Obama Announces New Loan Protections for Troops

The White House on Tuesday announced a new rule to better protect service members and their families from high-cost loans and predatory lending.

The changes, which will begin taking effect on Oct. 1, close loopholes in the 2006 Military Lending Act by expanding the definition of “consumer credit” to include payday loans, vehicle title loans, refund anticipation loans, deposit advance loans, installment loans and credit cards.

The new rule also will count charges for extra products, like credit default insurance, in calculating the military annual percentage rate “so lenders cannot skirt the rules by imposing extra fees,” said a White House fact sheet on the changes. The Obama administration emphasized that the tweaks preserve service members’ access to credit. “Today’s rules do not limit the access service members have to no-interest loans, grants, and scholarships from the four military relief societies – and they exempt certain products like small, short-term loans subject to federal usury limits, to make sure service members still have a range of choices when they borrow,” the fact sheet stated.

President Obama mentioned the changes in a wide-ranging speech to the Veterans of Foreign Wars on Tuesday in Pittsburgh. He said the new rule is designed to prevent predatory lenders from practices that “trap our troops in a vicious cycle of crushing debt.” In his remarks, Obama also discussed the efforts of the Veterans Affairs Department to reduce the length of the disability claims process, end homelessness among vets, and cut wait times for vets seeking health care. “I want you to know that I’m still not satisfied, Bob’s [VA Secretary McDonald] still not satisfied,” the president said, alluding to the VA’s struggle to root out mismanagement and improve accountability and services at the scandal-plagued department.

The Military Lending Act, designed to protect service members and their dependents from predatory lending, caps the military annual percentage rate at 36 percent and currently only applies to payday loans up to $2,000 with terms of 91 days or less, vehicle title loans with terms of 181 days or less, and tax refund anticipation loans. The law also provides other safeguards, including prohibiting lenders from requiring borrowers to sign away their legal rights. The loans are void if lenders violate the MLA, and bad actors also are subject to civil and criminal penalties.

The Military Lending Act does not apply to residential home mortgages or the financing related to purchasing or leasing a vehicle.

The announcement to close the law’s loopholes, which the Defense Department has been working on for the last three years, coincided with the fifth anniversary of the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act. That 2010 law also created the Consumer Financial Protection Bureau.