The Department of Defense first tried to shut down payday lending near military bases in 2007, but its rules contained loopholes wide enough to drive a tank through. Today, high-cost lenders remain fixtures outside the gates of bases from coast to coast.
On Friday the Pentagon unveiled its latest attempt to protect active-duty members of the military from the debt cycle that often accompanies small-dollar consumer credit.
The proposed regulations aim to make it harder for high-cost lenders to find ways around an annual percentage rate cap of 36% for service members.
The types of borrowing covered by the regulation would include installment loans, credit cards and other open-end credit products, according to a Pentagon press release. Those categories were excluded from the earlier version of the rules.
The revised rules could have a significant impact on the credit-card business, since plastic used by a member of the military would be subject to certain consumer protections that do not apply to the rest of the card industry.
In particular, the proposal appears to prohibit credit cards sold to active-duty military members from including mandatory arbitration clauses. Mandatory arbitration, which is commonplace throughout the card industry, is opposed by consumer advocates because it blocks borrowers from going to court.
But the Pentagon's press release also offered certain assurances to banks and other mainstream lenders. In the case of credit cards, it said that "bona fide fees that are reasonable and customary" will be excluded from the 36% interest rate cap. The press release also promises simplified disclosure obligations for lenders.
In addition, the Defense Department stated that lenders who check an existing database to determine whether borrowers are covered by the law will receive a safe harbor from legal liability.
The proposal drew praise from Sen. Jack Reed, D-R.I., who led the charge in Congress to close loopholes in the earlier regulations.
"This is good news for our troops and their families that will help prevent unscrupulous lenders from targeting our soldiers and saddling them with unnecessary debt," Reed said in a news release. "This lets our troops know we have their backs and are looking out for their future while they are out there working hard to protect us."
Gary Kalman, director of federal policy at the Center for Responsible Lending, expressed hope that the regulations will prevent high-cost lenders from targeting members of the military. "I think they're actually going to have to follow the rules," he said.
Meanwhile, representatives from banking trade groups, who spoke Thursday before the rules were released, said they hope the new restrictions will not go too far.
"I know from talking to representatives from the Department of Defense that they were very sensitive to not limiting credit," said Robert Rowe, vice president and senior counsel at the American Bankers Association.
Congress passed the Military Lending Act in 2006 after the Pentagon issued a report finding that predatory lending was undermining military readiness. The law specified the 36% annual interest rate cap, but it largely deferred to the Pentagon about which specific types of credit should be covered.
The regulations released by the Defense Department in 2007 cover payday loans of 91 days or less, auto-title loans of 181 days or less, and tax refund anticipation loans. Those loans are subject to the interest rate cap, a ban on prepayment penalties and a ban on mandatory arbitration clauses. The restrictions apply to active-duty members of the military and their dependents.
Credit cards and other forms of open-end credit are currently exempt. So are installment loans of 92 days or more, and car-title loans of 182 days or more.
Outside military bases such as Fort Hood in Texas and the Jacksonville Naval Air Station in Florida, as well as on the Internet, high-cost lenders have gotten around the Pentagon rules by simply tweaking the terms of their products.
Last year, Congress passed new legislation requiring the Defense Department to review the rules it had developed six years earlier. Then in April, the Pentagon signaled in a report that it planned to expand the types of credit that are subject to the interest rate cap and other consumer protections.
"I think there is a recognition that narrow definitions for these types of products don't work," said Tom Feltner, director of financial services at the Consumer Federation of America. "I think the market has changed, lending practices have changed, and I think the rules need to change with it."
Banking trade groups including the ABA, the Consumer Bankers Association, the Independent Community Bankers of America and the Association of Military Banks of America opposed making revisions to the regulations.
"The problem with expanding coverage is that it has unintended consequences for service members and their families since an expanded definition also would capture many beneficial credit products," the banking trade groups wrote last year in a comment letter.
Still, the president and chief executive officer of the Association of Military Banks of America, Andrew Egeland, said Thursday that his organization supports the purpose behind the Defense Department's new proposal.
"And that is to deal with the people who have been able to escape the scrutiny and the supervision, and still prey on members of the military," he said.
The Defense Department developed the proposed rule after consulting with federal banking agencies, the Consumer Financial Protection Bureau, the Federal Trade Commission and other agencies. The public will have the opportunity to file comments on the proposal before it is finalized.