I am pleased to report that the U.S. Department of Defense will strengthen rules designed to curb abusive lending to service members. This comes as Congress considers changes to a 2006 law that regulates small loans. The Senate Armed Services Committee has approved amendments to the Military Lending Act as part of its annual review of defense policy. One of the amendments would tighten the definition of payday loans to cover other high-interest products. The changes would also require the Pentagon to study and regulate installment loans aimed at members of the military.

In written testimony to the Senate Banking Committee, Colonel Paul Kantwill said: “The legislation has been extremely effective in stamping out abuses involving these types of credit.” According to Col. Kantwill, who is director of legal policy in the Department of Defense’s Office of the Undersecretary for Personnel and Readiness, the Department may publish advance notices of proposed rulemaking once it is clear what changes “may be included” in the final legislation.

Congress passed the law in response to complaints from the Pentagon that so-called payday loans were often harmful for service members and affected troop readiness. The law effectively banned payday lending to members of the military by limiting the loans to an interest rate of 36%. Payday loans are a form of short-term, high-interest credit in which borrowers leave a post-dated check in return for a loan that is due a few weeks later. Annual interest rates can rise as high as 512%, according to the Consumer Financial Protection Bureau.

Advocacy groups, including the Consumer Federation of America, have contended with good reason that some lenders have evaded the law by redefining their products without lowering the interest rates. Holly Petraeus, assistant director of the Consumer Bureau for Servicemember Affairs, said in written testimony:

I hear from financial counselors on the installations about the prevalence of payday-like products that are specifically marketed to military families — often with patriotic-sounding names and the American flags on the website to match, but with a sky-high interest rate. And the Internet is full of ‘military loans,’ some outright scams and others with very high interest rates.

Consumer and defense personnel groups, including the Consumer Federation and the Military Officers Association of America, have written senators supporting the proposed changes. Service members and their families must be protected from abuses that undermine their welfare and morale. The more I learn about how the predatory lenders operate, the more I realize they are only interested in their profits and care very little about their customers. I never will forget a memo we obtained through discovery in a case from a company supervisor that read, “Get them (the customers) in debt and never let them get out.” That was exactly the way the lender in that case operated and unfortunately so do many others.

Source: Business Week