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 36% 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.
Soldiers with high debt are considered a security threat and, as a result, often lose their military jobs. The Pentagon estimates it loses 4,700 to 8,000 soldiers annually due to financial distress, costing it between $270 million to $459 million, or about $57,000 per soldier.
"When I drive down the strip outside a military installation and count 20 fast-cash lenders in less than four miles, that's not a convenience, that's a problem," Holly Petraeus, assistant director of the Consumer Financial Protection Bureau's Office of Servicemember Affairs, said in a statement applauding the crack down.
Financial stress also is a top precipitating factor to military suicide that's been largely overlooked ever since the military suicide rate began to exceed comparable civilian rates more than a decade ago. The military's all-volunteer force has endured 13 years on a wartime footing through a devastating recession, both of which have contributed to high indebtedness and other financial distress for many soldiers and veterans. The beneficiary of every active-duty soldier who dies from any cause receives a $500,000 life insurance payout and other benefits, potentially acting as an inadvertent incentive to suicide.
In 2013, 479 active-duty troops, reservists and National Guard members killed themselves most by self-inflicted gunshot wounds or hanging. The official estimate of 22 veteran suicides a day is likely far under-estimated due to lapses in data collection from death certificates. Overall, military suicides account for a disproportionate amount about a fifth of all suicides nationwide.
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.
NO MANDATORY ARBITRATION
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 released Tuesday 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.
The tighter rules come at a time when banks and other financial institutions are facing tight regulatory scrutiny over their treatment of service members.
In the last two months, Bank of America and JPMorgan Chase have each been assessed $30 million civil penalties for alleged violations of the Servicemembers Civil Relief Act. That law provides various consumer protections to service members who are on duty overseas.
Jeffrey Naimon, a lawyer at Buckley Sandler who frequently represents financial institutions in these cases, said that banks are eager to avoid the perception that they are mistreating members of the military.
He noted that when banks are hit by regulatory actions involving service members, the banks' executives frequently offer a public apology, whereas they often stay silent with respect to other regulatory matters. "From a public relations standpoint, it's an enormously sensitive issue," Naimon said.
In April, a group of House Republicans tried to for the Pentagon to delay its new regulations. But that effort fizzledwhen five Republicans on the House Armed Services Committee joined Democrats in opposing a measure that sought to require the Pentagon to study the issue further.
Sen. Jack Reed, D-R.I., a longtime champion of stricter lending rules for active-duty service members, hailed the new rules Tuesday.
"This is a significant win for our troops and their families," Reed, D-R.I., 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."
Kevin Wack is a reporter for American Banker who covers the U.S. consumer finance industry. Ann Marsh contributed reporting to this story.
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