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How Lenders Get Away With Outrageous Interest Rates for Military Borrowers

A report released this month by the Consumer Financial Protection Bureau says loopholes in the Military Lending Act, passed in 2006, allow lenders to bypass some borrow protections and charge outrageous interest rates for military borrowers.

The CFPB analyzed various credit products offered to servicemembers that result in significantly increased costs for both the borrowers and their families. Among its findings, the CFPB says technicalities in the language of the legislation allow lenders to charge more than 300 percent APR on deposit advance products, similar to payday loans. For example, the spouse of a servicemember took out an auto title loan in Illinois and was charged $5,720.24 for a 12-month $2,575 loan.

According to the CFPB, while the Military Lending Act caps interest rates at 36 percent, the auto title loan was not subject to the Act’s protections because it lasted longer than 181 days.

Another lender, based online, was found to charge one servicemember 584 percent interest, allowed to do so because the loan was structured as an open-end line of credit not protected by the Limitary Lending Act. The CFPB says this company targets military borrowers and adds hidden costs in loan products, including a “transfer fee” and “credit access fee.”

In yet another case, the CFPB found that one servicemember took out an unsecured installment loan with an API of more than 83 percent. Further, under terms of the loan, the lender signed an arbitration agreement and agreed to the lender’s right to take possession of and sell the borrower’s property in the event of a failed payment, as the borrower put up personal property as security interest.

“These examples underscore the assessment that there are a number of ways that consumer credit products can be structured to fall outside the cope of the Military Lending Act, as it is currently implemented,” the report says. “This issue is of substantial concern to the Bureau and we will continue to use the tools available to us to address the consumer financial challenges affecting the military community.”

According to the CFPB:

As currently implemented, the Military Lending Act protections apply to three forms of credit, when such products are extended to servicemembers on active duty or their dependents: (1) closed-end payday loans with terms of 91 days or fewer and for $2,000 or less; (2) closed-end auto title loans with terms of 181 days or fewer; and (3) closed-end refund anticipation loans. Any loan that does not fall into one of these categories is not subject to the Act’s protections under the existing regulations implementing the Military Lending Act.

The CFPB’s report is part of an effort to encourage the Department of Defense to adopt its proposal to close some of these loopholes by broadening the scope of the Military Lending Act. The proposal would extend the Act’s borrow protections to payday or auto title loans of any length, any amount of payday loans, and open-end credit lines.

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