Law restricts family loan options - Military Money, Navy Money, navy pay, pay charts - Navy Times

Law restricts family loan options

Some military personnel and their families will find that certain loans are no longer available to them Oct. 1, as payday loan companies and other lenders consider their options in preparing for a new law that takes effect that day.

Some industry officials warn that military families need to be aware that these options are vanishing. The consensus is that many payday lenders will stop offering these loans to troops and their families rather than reducing their fees to meet the required cap of 36 percent on annual interest rates.

And sources said the tax preparation industry will be unable to offer refund anticipation loans to service members.

“The refund anticipation loan as we know it will not be offered to the military. The loan you got last year will not be available,” an industry source said.

Although the loans are made for less than two weeks, as with payday loans, the annualized cost of the loans total more than 36 percent interest.

The Defense Department’s final rules for implementing the law appeared in the Aug. 31 Federal Register. The law, passed as part of the 2006 Defense Authorization Act, caps the annual percentage rate at 36 percent, to include fees and other charges, on loans made to troops and their families.

The rules create a new term, “Military Annual Percentage Rate,” to describe the total cost of a loan, expressed as an annualized percentage rate. The MAPR would have to be disclosed before a military borrower agrees to a loan.

The law is designed to protect service members from predatory loans, which have been cited as contributing to a “cycle of debt” that causes financial problems for some personnel.

But military family advocates argue that the rules don’t go far enough. The rules cite payday loans, vehicle title loans and tax refund anticipation loans but do not address other types, such as military installment loans, which were cited in a 2006 Defense Department report as being part of the problem.

“Given the sweeping protections Congress gave, [the Defense Department] had the ability to clamp down on predatory lending, but they chose the least restrictive measures,” said Jessica Perdew, deputy director of government relations for the National Military Family Association.

In addition, the rules may create loopholes for some lenders, according to consumer advocates. Because they exempt loans of more than 91 days from the interest rate cap and other protections, they may not apply to some loans, said Jean Ann Fox, a consumer advocate for the Consumer Federation of America.

Defense officials said they considered these comments in crafting their final rule, but they “believe the scope of the proposed rule and the definition of consumer credit are appropriate,” and noted that additional rules can be issued if necessary.

In a related development, the Government Accountability Office issued a report Aug. 31 that challenges the findings and recommendations of the 2006 Defense Department report used in drafting the law.

Although the Pentagon’s proposals, which included the 36 percent interest rate cap, may have merit, “they were not directly linked to the report’s findings, were based on research studies that had some methodological problems, or did not address implementation issues,” the GAO report stated.

“The shortcomings we identified in some of the methods and approach indicate that caution is necessary when interpreting the findings for some areas of DoD’s report,” auditors said.

Some service members now pay more than 390 percent in annual percentage rates on payday loans, sometimes rolling over loans and piling up debt.

One major payday lender, Advance America, stopped dealing with military personnel nearly a year ago. “Some customers ... didn’t understand why military members did not have the same access as everyone else,” said Jamie Fulmer, spokesman for Advance America.

Even so, he said, the change affects a small percentage of the company’s customers — less than 0.4 percent of Advance America’s overall clientele are military.

Regardless of whether a company continues to lend money to the military, it will still have to take steps to determine whether the customer is, in fact, in the military, or it will risk violating the law.

Advance America officials are considering having all customers sign “covered borrower statements,” Fulmer said, which would require them to declare whether they are a service member or military family member.

In the final rules, defense officials suggested a format for this statement, with a warning to customers that making a false statement on a credit application is a crime. The rules note that a Defense Department Web site will be available for creditors to check on military or dependent status.

Don Gayhardt, president of Dollar Financial Corp., said that once the law takes effect, his company no longer will lend to people in the military. Employees at Dollar Financial’s 360 stores will ask whether a customer is a member of the military or a family member. They also will check other sources, he said.