When Congress approved the Military Lending Act in 2006, it likely did not foresee just how many lenders would exploit the federal law's numerous loopholes. Such loopholes put hundreds of thousands of service members at risk, making them vulnerable targets for predatory loans. Many service members lost their homes, jobs, and even their security clearances (the military can report a service member's personal financial debt as a threat to national security). Some service members even testified that lenders would threaten to report their debt to commanding officers in the event that they fall behind on their payments. Further, according to government agencies such as the Consumer Finance Protection Bureau and the Consumer Federation of America, a great number of service members have amassed so much loan-related debt that they are currently paying interest rates as high as 400 percent.
In light of this, the Obama administration has proposed changes that purport to shield service members from high-cost loans precariously linked with their next-month-paycheck, namely by applying the original law's protective 36% interest rate cap to a much broader spectrum of loans.
Additionally, the changes will require more creditor disclosure when dealing with military members, obligating lenders to assist service members in considering alternative forms of credit before choosing the most costly, high-risk option. Not only that, but creditors will no longer be permitted to insert an arbitration clause in credit agreements – a change that will preserve service members' rights to litigate claims in court.
Richard Cordray, director of the Consumer Financial Protection Bureau, candidly addressed the unfortunate reality that many lenders strategically exploited service members, even distributing brochures of men and women clad in uniform under slogans based on protecting military members.
"We have seen firsthand how lenders use loopholes in the rule to prey on members of the military," Cordray stated. "They lurk right outside of military bases, offering loans that fall just beyond the parameters of the current rule."
As Michael S. Archer, Director of military legal assistance for the Marine Corps Installations East, opined, "there were loopholes so large that you could drive a truck through them."
David R. Seely, President and CEO of Kirtland Federal Credit Union, advanced yet another argument in favor of tightening the law's loopholes. "We do get occasional referrals from first sergeants or maybe a chief master sergeant who is working with someone with a lot of debt," Seely stated. "They don't want a service member to get deployed with a lot of financial distractions that could affect their performance in the field."
Supporters of the law's changes hope to see them implemented by early 2015.