WASHINGTON The Consumer Financial Protection Bureau on Tuesday updated its exam manual for payday lenders to include how examiners will check for harm against military personnel.
The guide specifically helps identify potential violations in the Military Lending Act, which has stricter restrictions for short-term, small-dollar loans such as a 36% cap on the annual percentage rate. Though the rule is specifically to protect servicemembers, all payday lenders should take note as lawmakers are looking at this rule as the CFPB sets a federal framework in regulating all payday products.
"Protecting servicemembers is a priority for the CFPB," said CFPB Director Richard Cordray, in the release. "We will use the authority Congress gave us to enforce the Military Lending Act and to safeguard our men and women in uniform from illegal payday loans."
Payday lending has been a hot topic for regulators and policymakers in recent months as the product has shifted to the less regulated and costlier online avenue. Prudential bank regulators recently issued warnings to their financial institutions offering similar products and the Justice Department has aggressively come out against predatory payday lending. But many lawmakers are asking the CFPB to use its broader authority given through the Dodd-Frank Act to crack down on payday lending at the federal level, which it started to look at in January 2012.
"There seems to be a proliferation of online payday lending," said Rep. Mel Watt, D-N.C., at a House Financial Services Committee hearing last week on the CFPB's budget. Online payday lenders seem "to be able to evade state laws governing payday lending, and I'm interested in knowing, now that the CFPB has the ability to regulate payday lending, what options you're exploring in this arena and what is your timetable for doing so?"
Cordray responded that online payday lending was a concern for the agency since studies show most of such products will be online "in the next several years." But he did not offer a timeline for action.
"I think at the moment it's an issue that we see as a potential issue for enforcement and supervision. Perhaps rules," he said at the hearing. "These are things that we're looking at because they're hard problems. I've seen them at the state level. I know their frustrations. I work with the attorney generals constantly. We want to make sure that we all can be effective together."
In terms of setting a federal standard, however, the more recent and clear guidelines were directed by Congress in 2007 through the Department of Defense, which issued protections, including an interest rate cap, on payday loans to military personnel and their families. The Dodd-Frank Act gave the CFPB authority to enforce the Military Lending Act.
"Through its enforcement and supervisory work, the CFPB will be scrutinizing lenders to make sure that they are following the MLA requirements when they make short-term, small-dollar loans to servicemembers and their dependents," the CFPB said in its release.
Specifically, the CFPB noted that it will ensure payday lenders charge no more than an annual percentage rate of 36%, which includes all fees and loan costs. As part of the Military Lending Act, payday lenders also cannot allow a loan to rollover "unless the new transaction results in more favorable terms for the servicemember," the CFPB said. This is meant to stop the lender from racking up monthly fees when the borrower wants to renew the loan instead of paying it off. In terms of payment, the CFPB said lenders are also banned from requiring that servicemembers pay the loan through the military allotment system, which can reduce certain consumer protections and budget flexibilities.
The CFPB's exam guide will also make sure lenders do not force servicemembers waive their rights under state and federal laws, including the Servicemembers Civil Relief Act. This includes the servicemember's right to seek legal action against a payday lender.
The updated exam guide follows a report released in April by the CFPB on issues within payday and deposit-advance loans. Many consultants and lenders expect more action to come from the agency once it finishes reviewing the payday sector.
"The CFPB looks forward to continuing its strong partnership with the Pentagon to ensure appropriate protections for servicemembers and their families," the agency said in its release. "The CFPB is continuing to study the payday lending market to make it work better for all consumers and honest businesses."