MLA loopholes can skirt rate cap for servicemembers: CFPB report

December 29, 2014

WASHINGTON (12/30/14)--A report from the Consumer Financial Protection Bureau (CFPB) highlights how loopholes in the current Military Lending Act (MLA) rules can lead to increased costs for servicemembers.

Released Monday, "The Extension of High-cost Credit to Servicemembers and Their Families" shows ways companies have worked around the 36% military annual percentage rate (APR) cap and other protections.

The report looked at deposit advance products, which do not fall under protections currently offered by the MLA, over a 12-month period. It found:

  • ervicemembers took out more deposit advance products than civilians. Specifically, 22% of servicemember accounts obtained at least one deposit advance, compared with 16% of accounts held by servicemembers and the general population;

  • ervicemembers paid about $5 million in fees for these products. According to a sample of loan, the report estimates that servicemember borrowers took more than $50 million in deposit advances. For a typical fee of $10 per $100, these $50 million in advances would be associated with roughly $5 million in fees; and

  • ome depository institutions extended millions of dollars in deposit advance loans to servicemembers with APRs that typically exceeded 300%.

The report was included as an appendix to a CFPB comment letter filed with the Department of Defense (DOD) regarding proposed changes to the MLA that would broaden its scope to cover many more types of credit, including deposit advance products, as well as more types of payday, auto title and installment loans.

"Some credit card issuers and their vendors have engaged in significant unfair, deceptive, or abusive acts or practices, especially with respect to ancillary insurance 'add-on' products. Such practices are evidenced by a number of recent actions taken by the Bureau's Office of Enforcement against credit card issuers and their vendors for unfair, deceptive, or abusive acts or practices, particularly related to their marketing and sale of add-on products," the letter noted.

"Over the past three years, the Bureau has obtained approximately $1,708,500,000 in restitution and approximately $90,100,000 in Civil Money Penalties in actions against credit card issuers for these and other practices impacting more than 12 million Americans."

These credit card issuers are: Capital One Bank, Discover Bank, JPMorgan Chase Bank and Chase Bank, American Express Centurion Bank, Bank of America, Synchrony Bank and US Bank, according to the CFPB's letter.

The DOD's proposal has been met with some concern by the credit union community. A comment letter filed last week by the Credit Union National Association and others stated the organization's concerns that the changes could negatively affect the delivery of reasonably priced financial products to servicemembers.

CUNA believes that credit unions should be exempt from the DOD's proposal because the products cited as causing problems for servicemembers are generally not offered by credit unions. None of the specific lenders cited by the CFPB report or the DOD are credit unions.

National Credit Union Administration Chair Debbie Matz also submitted a letter with similar concerns. The NCUA issued a Payday Alternative Loan (PAL) regulation in 2010 as a way to provide affordable credit alternatives to military members. PALs could also be negatively affected by the proposed MLA changes.