NEW YORK (MainStreet) Among the many things the Consumer Financial Protection Bureau (CFPB) is tasked with doing is supervising payday lenders at the federal level. This was something new because payday lenders were never regulated by the federal government before. This was especially needed when it came to military personnel.
The CFPB established rules in September 2013 to ensure that these lenders comply with the Military Lending Act of 2007 (MLA). This is a consumer protection law specific to military personnel and their families because of their unique situation. The MLA gives military personnel more control over their personal finances.
According to the CFPB, "most (military) payday loans are for several hundred dollars and have finance charges of $15 or $20 for each $100 borrowed, a typical two-week term can equate to an annual percentage rate ranging from 391% to 521%."
The Defense Department issued a report in 2006 concluding that predatory lending practices constituted a genuine threat to the welfare of military personnel and their families. As a result, Congress passed the MLA. Congress amended the law by giving the CFPB the authority to enforce it.
The CFPB implemented several rules which payday lenders must follow for all "closed-end loans of $2,000 or less and with terms of 91 days or less." Annual Percentage Rates (APR) "must be capped at 36%." This figure "incorporates all fees and costs associated with the loan."
CFPB also banned payday lenders from rolling over loans for service members.
According to the CFPB: "When consumers cannot repay a payday loan at the time it is due, they instead pay only the finance charge and then renew the loan.This is called 'rolling over' the loan, and it does not reduce the amount owed. If a payday loan is rolled over multiple times, it's possible for consumers to pay several hundred dollars in fees and still owe the original amount borrowed."
Lenders are also prohibited from making service members waive their rights furnished by the Service Members Civil Relief Act, or from requiring service members to waive their right to seek a resolution of any legal claim in court according to CFPB. This stipulation will be strictly enforced now.
The CFPB will also prevent lenders from requiring military personnel to pay by the allotment system. This system permits military personnel to repay loans by payroll deductions taken right off the top - before their salaries are deposited into their account. Paying by allotment negates certain consumer protections and personal financial flexibility.
Professor H. David Robison, chair of the economics department at LaSalle University, noted that these payday lending schemes were an old ruse brought about by changes in consumer lending.
"That's the old loan shark on the corner lend money at some ridiculous rate," he said. "The government changed the rules to make it harder to declare bankruptcy than it used to be. Thus, it is harder for people to get out of their debts. But, the regulations also made it easier to engage in predatory lending which made it easier for people to get into the position where they need to declare bankruptcy. Anybody who has a short term cash crunch can get a loan - but they do at these ridiculously usurious rates."
While he thinks that this type of predatory lending is not unique to military personnel, they do make more attractive prey for lenders. They are working and their salaries are subject to strict military discipline. Plus they are right out of school, and they are often not sophisticated in finance.
"Many military personnel come right out of high school," Robison said. "By not going to college, they are never exposed to some of the basic economic principles. This makes them easier targets. They want a car or a house, but they do not know what they are getting into because they lack the basic economic skills."
--Written by Michael P. Tremoglie for MainStreet