New Predatory Lending Regulation

  • Published
  • By Michele Schull
  • Airman and Family Readiness Center
GRAND FORKS AIR FORCE BASE, N.D. --  The Department of Defense has been concerned about financial readiness for years based on guidance from surveys and military financial counselors. These counselors have continually told us about the negative impact of predatory lending on servicemembers and their families. Local payday lenders advertise a 20 percent initial fee. This doesn't sound outrageous to our young servicemembers as they compare it to credit card interest rates assuming it is an annual percentage rate. The maximum loan period for our servicemembers is 15 days between paychecks, which equates to 480 percent annual percentage rate. In addition, it doesn't cover any fees associated with extending the payback beyond the original due date.

For many years, the DoD has supported financial well-being by providing educational courses, local counseling resources, and by encouraging financial institutions to offer alternatives to predatory lending. In spite of these resources, it is challenging to educate and convince our young families about the benefits of various financial options. It is still up to the servicemembers and their families to make wise financial decisions and manage their money effectively.

To combat predatory lending, the Federal Anti-Predatory Lending Law took effect Oct. 1; authorized under the John Warner National Defense Authorization Act for fiscal year 2007. The most important protection extended to servicemembers (active duty, Guard and Reserve members on Title 10 orders for 30 days or more) and their families is a cap of 36 percent on the annual percentage rate charged for payday loans, vehicle title loans (illegal in the state of North Dakota) and tax refund anticipation loans. Under the law, this rate is referred to as the "military annual percentage rate," which includes all fees and charges known at the time of the loan. This prohibits charging additional fees such as origination fees, administrative fees, membership fees, credit insurance premiums and so forth to avoid the interest rate cap. However, the MAPR does not include fees or charges imposed for late payments, default, delinquency or similar occurrences. The creditor is required to inform the borrower of the MAPR, both verbally and in writing, and provide a statement informing military borrowers other resources available to them, including legal assistance, financial counseling and the option to seek assistance through the Military Aid Societies. The law prohibits rollovers unless the new transaction results in more favorable terms. This means that creditors cannot force a borrower to submit to mandatory arbitration or impose other legal provisions in case of dispute. It also prevents the creditor from waiving servicemembers' Civil Relief Act rights and onerous legal notices being sent to the borrower.

These new laws provide a better chance to influence servicemembers and their family's financial management and, in the event of financial difficulty, to avoid very high cost credit to cover bad financial circumstances.

Three main resources exist to ensure servicemembers and their families have access to emergency funding. First, the DoD is stressing all servicemembers should have an emergency savings fund for emergencies. The Military Saves Campaign, which encourages our servicemembers to become "savers," was a huge success last fiscal year. The DoD is already planning this year's Military Saves campaign, which will start Feb 24 and run through March 2, 2008 and will be run by the Airman and Family Readiness Center here. Second, our Military Aid Societies continue to be a resource and provide grants and no interest loans to servicemembers in need. Third, the Federal Direct Insurance Corporation is advocating for banks and credit unions to develop alternatives to pay day loans.

Additional resources for information call the community readiness consultants at the Airman & Family Readiness Center at 747-3241, Military OneSource (1-800-342-9647), Military HomeFront (http://www/militaryhomefront.dod.mil), banks and credit unions, and the Air Force Aid Society (contact a community readiness consultant at 747-3241).