A Defense Department plan to strengthen limits on credit products sold to military members has sparked familiar battle lines nearly a decade after Congress passed sweeping protections for service members.
The 2006 law limiting interest rates on service member loans to 36% gave the Pentagon broad authority to subject credit products to the cap. But regulations enforcing that provision have been seen as weak, allowing too many lenders to evade the restrictions.
Now as officials weigh stricter rules applying the rate ceiling to a much broader array of products industry representatives are vigorously warning against regulatory overreach while consumer groups are urging the Pentagon to enforce the protections to the full letter of the law.
"Our hope is that" Pentagon officials "come to their senses, because they're essentially cutting off credit for military servicemembers," said Bill Himpler, vice president of federal government affairs for the American Financial Services Association.
The Pentagon's proposal would extend the rate cap nearly to all types of loans covered under the Military Lending Act. Currently, the cap only applies to short-term payday loans, auto-title loans and refund-anticipation loans. But the proposal would cover types of credit more commonly offered by banks, such as credit cards, installment loans and student loans. (The 2006 law exempts mortgages and auto loans from the cap.)
The plan would also require lenders to determine whether a borrower is in fact covered by the restrictions, rather than relying on service members to identify themselves. One criticism of the Pentagon's 2007 rules is it allows borrowers to hide the fact they are in the military.
Reaction to the proposal has ranged from industry lobbyists' insistence that the Pentagon scrap the plan entirely to demands that the rule be even tighter. The Defense Department is considering all of the feedback as it crafts a final rule, which observers expect before the end of 2015. The public comment period closed at the end of last year.
Consumer advocates say the new proposal would provide a much-needed patch to the original rules, which they say were too thinly tailored.
"We have clearly learned the lesson of what happens when you define payday lending too narrowly," said Tom Feltner, director of financial services at the Consumer Federation of America. "The consumer credit market has evolved rapidly, and the 2007 rules have become less effective over time."
But industry representatives counter that the Pentagon plan may ultimately lead financial institutions to cease offering products to service members. They argue, for example, that the tougher restrictions would make it nearly impossible for lenders to offer smaller-dollar loans, which are less profitable with rates at or below 36%.
They also argue the proposal would require lenders to develop separate sets of products for members of the military, which make up a small proportion of their customer base, including separate disclosures and term sheets. For example, credit card products sold to service members could not include mandatory-arbitration clauses, which are banned under the proposal.
Many lenders may stop offering credit to servicemembers rather than deal with the intricate new rules, said Nessa Feddis, deputy chief counsel for the American Bankers Association. (The ABA joined several other trade groups, representing both banks and credit unions, to criticize the plan in a joint comment letter.)
The proposal "is so complicated that I don't think compliance is an option," she said. "How can you operate a two-tier system for the small number of loans to military personnel? Do you create a parallel product, or do you not offer these products?"
Yet consumer groups say the rules are badly needed since the original Pentagon plan was so watered down that even some of the products that lawmakers appeared to target specifically in the statute can still evade the rate cap. Lenders have routinely avoided the restrictions by, for example, offering open-ended credit lines at high rates or extending the terms on payday loans.
The limited scope made the rules "pathetically easy to game," said Gary Kalman, director of federal policy for the Center for Responsible Lending.
But which loans are subject to the rate cap is not the only concern for the industry. The new proposal would require lenders to identify active-duty military members and their families using the Defense Department's public database. But that requirement opens up a host of potential problems, industry groups say.
"The database requirement would take a rule meant to apply just to the three million military members and their families and potentially open it up to entire U.S. population," said Himpler. "It would affect everyone."
Banks would have to run the name of anybody applying for a loan through the Pentagon's database in order to determine his or her military status, Himpler added. That would make it nearly impossible to preapprove customers for loans, or to issue preapproved credit cards, he said.
The joint industry letter said the database is not reliable. The website is "frequently unavailable" and "inaccurate," the groups said.
"Beyond the huge and impractical project the proposal creates for all depository institutions in order to identify a small percentage of customers, the lack of reliability of the Department's current [military-status] database... has a realistic potential to bring consumer lending to a halt on frequent occasions," the letter said.
Some industry groups including the ABA, Independent Community Bankers of America and National Association of Federal Credit Unions are pushing the Pentagon to exempt depository institutions from the tougher rules.
Other industry advocates take an even harder line. Himpler, whose organization represents nonbank consumer-credit companies as well as banks, hopes the Pentagon "goes back to the drawing board."
But winning concessions from the Pentagon may be difficult considering the magnitude of support for the rules outside the industry. Hundreds of consumer groups and military advocates support the proposal.
A comment letter from the Consumer Federation of America, which was signed by 188 advocacy groups, said the new rules would strike "an appropriate balance between access to credit and restricting access to high-cost, abusive credit."
Meanwhile, some want the Pentagon to take an even tougher stance. Twenty state attorneys general sent a letter suggesting that the rules include fees in calculating whether a product exceeds the cap on annual percentage rates. Without this change, they argued, the new rule like the 2007 regulations could leave an opening for abusive practices.
The effort to oppose abusive lending is "laudable," but "the proposed regulations could do more to protect servicemembers," the AGs wrote in their Dec. 22 letter. "We fear this proposed amendment will open a wide door through which creative lenders may pass."