Military  Military Predatory Lending FAQ

Predatory Lending FAQ
Why was there a need for a law and regulation against predatory lending to military service members?
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 anticipation loans.

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 rate?
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 status.

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 borrower?
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 credit counselor."

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 borrower?
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 funds.

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 money quickly?
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 confidential programs?
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) 342-9647.

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)
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