Predatory Lending FAQ
there a need for a law and
regulation against predatory lending to military service
Predatory lending practices have continually had a negative
effect on the financial well-being of Service members and
their families. The Department of Defense (DoD) supports their
financial well-being by providing education and counseling and
by advocating that established financial institutions and
various Service mutual aid societies provide the best
financial support in emergencies.
The DoD has found that education and counseling are an
important aspect of protecting Service members and their
families; however, there is only a narrow window of
opportunity to inform and convince young families of what may
constitute a beneficial product to fit their circumstances,
particularly when there are many messages to the contrary.
What lending products did the Defense Department review
when it began to investigate this issue?
The DoD reviewed payday loans, vehicle-title loans,
rent-to-own agreements, tax refund anticipation loans, and
military installment loans. Installation-level financial
counselors and legal assistance attorneys who regularly
counsel service members on indebtedness issues identified
these five products as the most detrimental financial products
available to Service members.
The products reviewed represented two kinds of financial
problems for Service members and their families. Payday and
vehicle title loans represent products that can contribute to
a cycle of debt, and rent-to-own agreements, installment
loans, and tax refund anticipation loans represent products
that can cost the military consumer high fees and interest
charges. The cycle of debt products represent a more
significant concern to the DoD than the high cost of credit.
When developing the regulation, these five products were
examined closely. Payday loans, vehicle title loans and tax
refund anticipation loans were ultimately covered by the
regulation because of their consistent cycle of debt or high
cost characteristics and the ability to regulate these
products under the limitations imposed by the law without
creating unintended restrictions for Service members and their
families to obtain beneficial credit.
What kinds of credit are covered by the new regulation?
The regulation covers payday loans, vehicle title loans, and
tax refund anticipation loans, which are closed-end credit
offered or extended to Service members and their family
members. The DoD believes that a narrow definition could
prevent unintended consequences while affording the
protections granted by the statute.
What is closed-end credit?
Closed-end credit is repaid in full, along with any interest
and finance charges, by a specified future date. Most real
estate and auto loans are closed-end. (The opposite is a
revolving line of credit, which is an agreement by a bank to
lend a specific amount to a borrower, and to allow that amount
to be borrowed again once it has been repaid.)
What are payday loans?
A payday loan is defined as closed-end credit transactions
having a term of 91 days or fewer, where the amount financed
does not exceed $2,000. The definition is limited to
transactions where the borrower provides a check or other
payment instrument that the creditor agrees to hold, or where
the borrower authorizes the creditor to initiate a debit or
debits to the covered borrower's deposit account.
Payday loans have common characteristics that make them
detrimental to a Service member's financial well being. These
characteristics can exacerbate a cycle of debt, particularly
if the borrower is already over-extended through the use of
other forms of credit. Payday loans, otherwise known as
deferred presentment loans, are allowed in 39 states as a
separate credit product from other forms of credit regulated
by federal or state statute.
What are vehicle title loans?
A vehicle title loan is closed-end credit with a term of 181
days or fewer that is secured by the title to a motor vehicle,
registered for use on public roads, and owned by a covered
borrower. The lender retains the title to the vehicle until
the loan is repaid; the borrower may lose ownership of the
vehicle if he or she defaults on the loan.
Vehicle title loans do not include loans used to purchase a
motor vehicle. As with payday loans, the DoD does not want
protections from high-cost, short-term vehicle title loans to
unnecessarily inhibit covered borrowers from accessing
beneficial loans for which a vehicle is used as collateral.
What are refund anticipation loans?
This is closed-end credit in which the covered borrower
expressly grants the creditor the right to receive all or part
of the borrower's income tax refund or expressly agrees to
repay the loan with the proceeds of the borrower's refund.
They have been included because survey data has shown refund
anticipation loans to be the second most prevalent high-cost
loan used by Service members and because alternatives that can
expedite their tax returns are available, generally at no
cost. Some states have also addressed concerns with refund
What is the Military Annual Percentage Rate (MAPR) and how
is it different from the Annual Percentage Rate (APR)
currently disclosed by a creditor when extending credit?
The Military Annual Percentage Rate is the cost of the
consumer credit transaction expressed as an annual rate, much
like the annual percentage rate currently required to be
disclosed by a creditor. It differs from the currently
disclosed annual percentage rate in that it also includes
other fees and charges that currently are not required to be
disclosed to the consumer as part of the Truth in Lending Act
definition of annual percentage rate. The military annual
percentage rate includes administrative and membership fees,
insurances, and other fees known at the time the loan is
signed and obligated. The only fees not added into the
military annual percentage rate calculation are late payment
fees and default fees (which would not accrue if the loan were
paid on time), and fees that are obtained by the creditor as a
pass-through to the state and not under the control of the
creditor to adjust.
There was concern that the military annual percentage rate
would confuse military consumers because it would be provided
along with the current annual percentage rate disclosure.
Military consumers are being given this additional piece of
information to allow them to fully understand how much the
loan will cost them. The DoD also designed the definition of
military annual percentage rate within the context of the
consumer credit covered by the regulation. The DoD's intent is
to ensure that the credit products covered by the regulation
cannot circumvent annual percentage rate limits by announcing
a low annual percentage rate while adding in high fees
associated with origination, membership, administration, or
other costs that may not be captured in the traditional Truth
in Lending Act definition of the annual percentage rate.
What are the fees excluded in military annual percentage
The military annual percentage rate does not include fees
imposed on the borrower for unanticipated late payments,
default, delinquency or a similar occurrence, because such
fees are imposed as a result of contingent events that may
occur after the loan is consummated. Also, the military annual
percentage rate does not include fees imposed on the creditor
by the state that are passed along to the consumer.
Who is a covered borrower?
The law defines who is covered by the regulation: Service
members on active duty, members of the Guard and Reserve who
are on Title 10 orders for more than 30 days, their spouses
and children, and individuals who receive at least 50 percent
of their financial support from the Service member for 180
days prior to applying for the loan.
Creditors have to know if they are providing a loan to a
covered borrower, and the Defense Department cannot identify
all instances when an individual may qualify as having
received at least 50 percent of their financial support for
180 days prior to applying for the loan. Consequently, the
regulation allows creditors to ask the borrower if he or she
is a covered borrower through a declaration.
What is the covered borrower declaration?
The covered borrower declaration is a written statement signed
by credit applicants to identify if they are included in the
definition of covered borrower. It does not require an
applicant to specify the exact basis for claiming covered
It is very important that the applicant answer truthfully even
if this means he or she may be denied the opportunity to
obtain the loan. Misrepresenting the status of the applicant
is considered a false statement and is a punishable offense.
What written disclosure must a creditor provide a covered
Covered borrowers seeking a payday, vehicle title, or refund
anticipation loan must be provided certain information in
writing. This includes the MAPR and all other information
required to be disclosed under the Truth in Lending Act (for
example: schedule of payments). They must also be provided the
following statement in writing:
"Federal law provides important protections to regular or
reserve members of the Army, Navy, Marine Corps, Air Force, or
Coast Guard, serving on active duty under call or order that
does no specify a period of 30 days or fewer, and their
dependents. Members of the Armed Forces and their dependents
may be able to obtain financial assistance from Army Emergency
Relief, Navy and Marine Corps Relief Society, the Air Force
Aid Society, or Coast Guard Mutual Aid. Members of the Armed
Forces and their dependents may request free legal advice
regarding an application for credit from a service legal
assistance office or financial counseling from a consumer
This statement means the members of the Armed Forces on active
duty and their dependents have several other options to get
emergency funds that are far less financially hazardous than
high cost, short-term loans. The protections the regulation
offers is not a wall preventing a covered borrower from
getting assistance, rather it is more like a flashing sign
pointing out danger and directing the covered borrower to a
safer way of satisfying immediate financial needs.
What oral disclosures must a creditor provide a covered
The law and the regulation require the new disclosures (in
addition to the Truth in Lending Act disclosures) to be
provided to a covered borrower both orally and in writing.
This means the creditor must tell the covered borrower orally
what the MAPR is and provide the required statement about
alternative sources for financial assistance and emergency
What are the consequences for breaking the law?
Any credit agreement subject to the regulation that fails to
comply with its terms is void from inception. The rule further
provides that a creditor or assignee who knowingly violates
the regulation shall be subject to certain criminal penalties.
Creditors may be hesitant to offer payday loans, vehicle title
loans, and refund anticipation loans to covered borrowers.
Consequently, applicants associated with active duty military
members must provide an accurate statement of whether they are
covered by the law and regulation
What is being done to ensure Service members and their
families have access to emergency funding?
Three main things are being done. First, the Defense
Department is stressing that all Service members should have
an emergency savings fund. (Most emergencies can be handled
with $500 in savings.) This was one of the core messages of
the "Military Saves Campaign" held February 25th - March 4th
2007. This same message will be re-emphasized during next
year's campaign, February 24th - March 2, 2008. Second, the
Military Aid Societies, who are champion advocates against
predatory lending, continue to provide grants and no-interest
loans to Service members in need. Third, the Department has
been joined by the Federal Direct Insurance Corporation to
encourage banks and credit unions to develop small,
low-interest loans for Service members and their families if
they are caught in a financial bind. Currently there are
financial institutions on about 51 installations providing
these types of loans and more are considering doing so.
What alternatives do Service members have if they need
The Defense Department prefers that Service members and their
families who experience financial duress seek help through
Military Aid Societies, military banks, and defense credit
unions rather than through credit products that would more
likely mire them in a cycle of debt. These preferred
institutions have established programs and products designed
to help Service members and their families resolve their
financial crises, rebuild their credit rating, and establish
savings. We are advocating that more financial establishments
develop such protocols.
The Military Aid Societies are strong advocates for limiting
the cost associated with credit and for creditors to develop
alternative products for Service members who cannot otherwise
qualify for loans. Within their own resources they provided
$87.3 million in no-cost loans and grants to Service members
and their families in 2005. These funds were provided for
emergencies and essentials, such as rent, food, and utilities.
Where can Service members go to get good financial
counseling to avoid the cycle of debt altogether? Are there
Financial management courses and personalized support from
financial management specialists - often known by their
initials, "PFMs" - are available at military installations. In
the Army, these services are located at the Army Community
Service Office; in the Navy and Marine Corps, you'll find
these services and experts at the Fleet and Family Support
Office; and in the Air Force, they are located at the Airman
and Family Readiness Center.
Military OneSource offers free, confidential financial
planners and counselors available toll-free 24/7 at (800)
Military HOMEFRONT, the official Department of Defense Web
site for reliable quality of life information to help Service
members and their families, leaders and service providers -
see the 'Personal Finance' section.
Banks and credit unions located on military installations are
excellent resources. They provide financial management
education in addition to providing lending services.
The magazine, Military Money, published four times a year, is
available without charge and is distributed via the Defense
Commissary system. This is great resource.
Each of the Service aid societies assist Service members and
their families through counseling, grants, loans and a number
of other services, to include referral to outside agencies.
(Source: Department of Defense)