WASHINGTON — The Obama administration wants to close legal loopholes that have placed hundreds of thousands of service members at risk of excessive payday or car title loan fees from creditors who are exploiting gaps in a 2006 military lending law.
The Department of Defense on Friday proposed new rules to toughen the Military Lending Act's limits on interest rates for certain types of credit available to servicemen, servicewomen and their dependents.
Under current law, lenders cannot charge members of the military more than 36 percent interest. But the loans covered by the law are so narrowly defined that lenders can make simple adjustments to get around its provisions.
The proposed rules would broaden the definition of consumer credit so that more loans would fall under the provisions of the 2006 law. Final rules likely won't take effect until next year; the public and interest groups have 60 days to comment on the plan.
Government agencies like the Consumer Finance Protection Bureau and private organizations like the Consumer Federation of America have compiled long lists of soldiers, sailors and airmen who have amassed heavy debts paying interest rates as high as 400 percent.
Currently, loans covered by the 36 percent cap on interest are payday loans of $2,000 or less with terms of no more than 91 days, loans that are secured by a personal vehicle with terms of no more than 181 days, and tax refund anticipation loans.
The consumer protection bureau and the Pentagon found that some lenders made slight alterations to the loans, making them for $2,001 or adding one day to the terms in order to bypass the interest cap.
The new rules would apply to a much broader array of transactions with the exception of residential mortgages and credit for personal property purchases, such as a car loan. Moreover, the 36 percent cap would apply to all interest and fees associate with a loan and creditors would have to disclose more information about the loan and its terms to military borrowers.
In responses to an advance notice of the Pentagon's proposal last year, financial industry members warned that the changes could create unintended consequences and reduce the availability of credit for service members.
The Pentagon estimates that the first-year cost to lenders of complying with the new rules would be $96 million, but officials said that figure would be exceeded by the potential savings from reducing the number of service members who leave the military due to financial distress.