A report from the Consumer Financial Protection Bureau (CFPB) released on Monday uncovers how lenders have been taking advantage of loopholes in the Military Lending Act to exploit families.
The regulations designed in the act were originally intended to protect families from predatory firms, but now the Department of Defense is asking for an expansion of the legislation. Active-duty military personnel are still being tricked trough add-on fees and incredibly high interest rates. As of 2013, the CFPB has been given enforcement jurisdiction by Congress and is further investigating the matter. A November 20, 2013 Senate Committee on Commerce, Science, and Transportation discussed the issue of lenders designing loans to bypass regulations, specifically as it relates to servicemembers.
“The inevitable question arises: Is this a group of bad actors, or are there systemic failures, or both? In our experience, the answer is both. There are always “frequent fliers” who cultivate a degree of chaos which makes, for example, a move from Tennessee to New York nearly imperceptible, and which makes the transactions themselves appear legitimate to an uninformed reviewer. There are also abusive business and investment models which permit billions of dollars of fraud to evade regulatory oversight,” said Deanna R. Nelson, assistant attorney general of New York, at the hearing.
One particular example CFPB highlighted was a case in Illinois, where a servicemember’s spouse took out an auto loan with an annual percentage rate of 300 percent. The lender evaded regulations by extending the loan beyond 181 days, which allowed the loan to far exceed the mandated limit of just 36 percent.
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“Although the Military Lending Act prohibits lenders from taking a non-purchase money security interest in the vehicle of a borrower covered by the law, charging a rate of interest in excess of 36 percent, and requiring covered borrowers to submit to arbitration, the auto title loan in Illinois was not subject to the protections of the Military Lending Act because it had a duration longer than 181 days,” the report noted.
Some internet-based lenders had annual percentage rates of 584 percent and charged customers additional fees under the guise of a “credit access fee” and “transfer fee” every single time a servicemember drew on the credit line. Again, regulations were evaded because the loan was actually categorized as an open-end line of credit.
Other creditors used a combination of loans exceeding the protected amount and the protected time-length, in order to bilk servicemembers.
“The current rules under the Military Lending Act are akin to sending a soldier into battle with a flak jacket but no helmet. To give our troops full-cover protection, the rules need to be expanded,” said CFPB Director Richard Cordray in a public statement. “The Department of Defense’s proposed revisions will go a long way toward better shielding our military from high-cost credit products.”
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