A Defense Department proposal to strengthen financial protections for military personnel is still too weak, according to attorneys general from 20 states.

The department proposed rules in September to strengthen protections for active-duty members of the military from the pitfalls of small-dollar consumer credit. The proposal is supposed to make it harder for high-cost lenders to dodge an annual percentage rate cap of 36% for service members, and it would do other things including ban mandatory arbitration clauses in credit card agreements with service members.

The attorneys general, including Eric Schneiderman of New York and Lisa Madigan of Illinois, on Monday urged Pentagon officials to make at least two major changes.

They seek the elimination of an exemption to the 36% cap that would be granted to "bona fide" credit card fees that are "reasonable and customary."

That exception "will open a wide door through which abusive fees of creative lenders may pass," the attorneys general wrote in a letter to the Pentagon as part of the public comment process tied to the plan.

The letter also criticizes the plan for failing to tighten an exemption for loans that are secured by purchased property. "Unscrupulous lenders are willing and able to use this exemption regularly and disingenuously to cover transactions that exemplify the abusive credit practices Congress sought to ban," the letter said.

It cited the example of a now-defunct Atlanta firm, Smart Buy/Rome Finance, that persuaded service members to purchase household electronics and other items at 300% markups. The loans were "nominally" secured by the items, allowing the lenders to skirt the lending cap, the letter said.

 

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.