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CFPB Lays Out Exam Guidelines For Payday Lenders To Servicemembers
WASHINGTON (9/18/13)--Consumer Financial Protection Bureau (CFPB) examiners should be clear on how to identify consumer harm and risks related to Military Lending Act (MLA) violations when supervising payday lenders under new guidelines released Tuesday by that agency.

"Protecting servicemembers is a priority for the CFPB," said CFPB Director Richard Cordray. "We will use the authority Congress gave us to enforce the Military Lending Act and to safeguard our men and women in uniform from illegal payday loans." The act provides protections for military families, such as capping the annual percentage rates (APR) for short-term, small amount loans at 36%.

Because most payday loans are for several hundred dollars and have finance charges of $15 or $20 for each $100 borrowed, a typical two-week term can equate to an APR ranging from 391% to 521%, the CFPB noted.

Loans from federal credit unions are generally limited to an annual percentage rate of no more than 18%, although there is some flexibility under the National Credit Union Administration's short-term, small-amount loan program. That program permits federal credit unions to charge an interest rate that is a maximum of 10 percentage points above the established usury ceiling at that time. For now, this amounts to an interest rate ceiling of 28%.

A Department of Defense (DoD) report issued in 2006 concluded that predatory lending practices by payday lenders and other creditors near military bases were a threat to military personnel and their families. The next year, the U.S. Congress passed the MLA to help address the problem.
 
Under the law, lenders must follow certain requirements for all closed-end loans of $2,000 or less and with terms of 91 days or less. In addition to the 36% cap, these requirements include:
  • No rolling over of loans. Payday lenders are banned from rolling over loans for servicemembers, unless the new transaction results in more favorable terms for the servicemember;
  • No signing away of servicemember rights provided under the Servicemembers Civil Relief Act or other state or federal laws that provide consumer protections. The MLA also prohibits lenders from requiring servicemembers to waive their right to seek resolution of any legal claims in court; and
  • No requiring allotments to repay. The MLA bans lenders from requiring military members to pay by the allotment system and gives servicemembers control over how their income is spent. When servicemembers pay by allotment, they lose certain consumer protections as well as their flexibility to adjust their budget if a financial emergency comes up.
In general, the MLA shields active-duty military personnel, active National Guard or Reserve personnel, and their dependents. In 2012, Congress gave the CFPB MLA enforcement authority.

In a related event, last month, in response to a DoD request for information regarding limitations on terms of credit extended to servicemembers, the Credit Union National Association and the Defense Credit Union Council jointly filed a comment letter that included a list of 35 credit unions operating on military installations that currently offer small-dollar alternative loan products.
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