The Obama administration on Tuesday finalized regulations cracking down on high-cost loans to members of the military, though they also included at least one significant concession to the financial industry.
The rules, which take effect Oct. 1, are meant to make it harder for lenders to get around an eight-year-old interest rate cap on loans to active-duty service members.
Under the earlier regulations, installment loans of 92 days or more and auto title loans of 182 days or more were exempt from the interest rate cap, and many high-cost lenders continued operating outside the gates of military bases across the nation.
"I have to tell you, some of the worst abusers, like payday lenders, are exploiting loopholes to trap our troops in a vicious cycle of crushing debt," President Obama said Tuesday during a speech at the Veterans of Foreign Wars national convention in Pittsburgh.
"So today we're taking a new step. The Defense Department is closing these loopholes so we can protect our men and women in uniform from predatory lenders. It is the right thing to do," Obama added.
Under the new regulations, all payday loans, auto title loans, installment loans, refund anticipation loans, deposit advance loans and credit cards will now be covered. Furthermore, charges for most so-called add-on products, including credit default insurance, will be counted toward the interest rate cap.
In addition, the new rules bar lenders from requiring members of the military to submit to mandatory arbitration. Mortgages and auto loans, which were exempt from the earlier Pentagon rules, will continue to be unaffected by the regulations.
A Defense Department proposal from last fall included a requirement that lenders check a database in an effort to determine whether a particular loan applicant is a member of the military. The goal was to prevent soldiers from lying about their military affiliation in order to qualify for expensive loans.
But that idea was panned by various financial industry trade groups, and the final version of the Pentagon's rules softens the burden on lenders. The rule states that lenders are permitted, but not required, to use information from the database to determine whether a prospective borrower is an active-duty member of the military.
The restrictions on high-cost loans to soldiers and sailors date back to the Military Lending Act of 2006, which banned annual percentage rates of greater than 36%.
In 2007, the Pentagon wrote regulations implementing the law, which defined a loan's annual percentage rate using a different mathematical formula than banking regulators use. That separate formula will endure under the Pentagon's new rules. The 2007 rules also included the exemptions for longer-term loans that are now being eliminated.
Sen. Jack Reed, D-R.I., a longtime champion of stricter lending rules for active-duty service members, hailed the new rules.
"This is a significant win for our troops and their families," Reed said in a press release. "Predatory lending is a threat to military readiness and therefore our national security, and frankly these commonsense protections are long overdue."
CU Trades React
Credit union trade groups were cautious in their reaction to the new rule.
Quincy Enoch, military liaison at NAFCU said the trade group has "always supported protecting the troops from predatory lenders. We appreciate DoD [Department of Defense] taking a measured approach with the final rule."
"We are still carefully reviewing it to assess its full impact on our members," Enoch added. "Credit unions have a long track record of providing much needed financial services to the troops, and NAFCU believes that regulators should be cautious of burdening this relationship."
Elizabeth Eurgubian, CUNA's deputy chief advocacy officer, said: "We appreciate that there is a one-year safe harbor period for compliance with this rule. CUNA strongly supports MLA protections for service members from unscrupulous business practices of organizations targeting our military personnel but will continue to evaluate the rule as the DoD did not completely exempt credit unions, who have always been dedicated to the financial well-being of their member-owners, from the reach of the regulation."
NCUA Chairman Debbie Matz, however, called the final lending rule a "major victory" for members of the military and the CUs that serve them
"Military servicemen and servicewomen put their lives on the line each and every day," Matz said in a statement. "Unfortunately, some are victimized by predatory lenders each and every day. NCUA, like the Defense Department, is working to ensure that military members who protect our nation are protected from predatory lenders. So we are very grateful to the Defense Department for revising their rule as we requested."
She added that the final rule will allow military members to "continue receiving affordable payday alternative loans (PALs) which meet NCUA's regulatory standards for consumer protection."
-Palash Ghosh contributed to this article.