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Are Big Changes Coming To The Military Lending Act?

Changes may soon be coming to the Military Lending Act (MLA), a piece of legislation designed to prevent military service members from getting swept up in deceptive or unfair lending practices.

According to documents procured and reviewed by National Public Radio, it looks like the effort to roll back some of the protections – specifically those sections that are meant to protect military members taking out car loans – are being pushed by the White House itself. Separately, according to NPR, the administration is working broadly to roll back enforcement of the law and its provisions.

The move has not been without controversy.

“If the White House does this, it will be manipulating the Military Lending Act regulations at the behest of auto dealers and banks to try and make it easier to sell overpriced rip-off products to military service members,” said Christopher Peterson, a law professor at the University of Utah, who reviewed the documents.

“It will go from a proactive system to something that is completely reactive,” Peterson said. “Over time, it is going to have a real impact on the lives of these people who devote their lives to the service of our country.”

The Gap Insurance Controversy 

The product causing concern on the auto lending side of things is gap insurance. When a customer purchases a car, particularly a new car, the car loses value as soon as it’s driven off the lot. Potentially, if the car is totaled early in its lifetime, the consumer may owe more on the car than the insurance will cover. Gap insurance, as its name implies, fills in the difference.

Getting gap insurance is not hard, nor is it expensive – it costs about $20 or $30 a year when purchased as part of an auto insurance bundle.

“But if you buy it from your car dealer, they may mark it up,” Peterson explained to NPR. “I’ve seen gap insurance policies being sold for $1,500” over the course of the loan.

The MLA essentially bans auto dealers from tacking on the gap insurance product and then rolling it into a car loan. The White House, according to NPR’s documents, seems sympathetic to industry requests that that regulation be rolled back. Peterson noted that the revised rules could also allow dealers to roll in all kinds of other add-on products.

The other side of this issue begs to differ, noting that gap insurance is a service and that military members are entitled to the same services as everyone else.

“Service members certainly should have the same access to credit protection that their civilian counterparts have,” said Paul Metrey, vice president of regulatory affairs and chief regulatory counsel for the National Automobile Dealers Association.

Peterson agreed, but added that gap insurance is not a value-added product that it is hard to come by, and that any customer who is buying a car will be purchasing auto insurance as well. An auto insurer will almost certainly charge that service member a better rate, according to Peterson.

And cars are not the only point of controversy. It seems there is some concern that who and how military members receive lending could also be making a major turn – and not necessarily for the better.

New Lending Rules 

While the question over cars has kicked up some dust of late, the bigger concern over the future of the MLA is over enforcement, and how the Consumer Financial Protection Bureau (CFPB) will manage it for service members going forward.

Mick Mulvaney, the acting director of the CFPB, has announced that going forward, the Bureau will no longer monitor payday lenders to determine whether they are violating the Act and cheating military personnel. They will, however, continue to investigate concrete claims of abuse.

Retired Army Col. Paul Kantwill recently left a position at CFPB, where he worked on issues facing service members. He noted that he was extremely concerned about the possible new regulations, and believed that merely prosecuting complaints will be insufficient to hold back the problem.

Kantwill told NPR that what is being proposed is akin to “removing the sentries from the guard posts guarding your military installation or your compound.”

And it is protection that Kantwill said troops really need, because as recently as 20 years ago, large-scale predatory lending was a massively damaging problem for military members. He recounted the 21 or so high-cost lenders and vehicle title loan businesses that used to camp out just outside Fort Campbell, Kentucky waiting to get a crack at soldiers.

“The Military Lending Act and the regulations that implement it have gone a long way toward eliminating a lot of those practices,” he noted.

So why would the CFPB pull back under enforcement?

According to Mulvaney, the CFPB doesn’t seem to actually have the legal power to hunt out law violations. The Bureau is planning to ask Congress for express permission to actively monitor lenders’ MLA compliance if that is what lawmakers intended, according to an internal document that NPR was able to access. It is unclear whether Congress would be likely to authorize such powers.

Kantwill believes this interpretation is incorrect. “There is a broad specific authority for the Bureau to be able to examine for these sorts of issues,” he said.

As for the issues with auto loans? The Defense Department said the issue is still in the proposal stages, and that a change will be made “only if necessary and in a way that does not reduce the MLA protections afforded to service members and their families.”

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