Dept. of Defense issues report to Congress on Military Lending Act rate cap

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The Department of Defense (DoD) has issued a report to the House Committee on Armed Services regarding the impact of a Military Annual Percentage Rate (MAPR) cap lower than 30% on military readiness and servicemember retention.  The DoD, in consultation with the Treasury Department, was required to provide the report by the National Defense Authorization Act for Fiscal Year 2021.

The report includes the following highlights:

  • The DoD “believes the MLA [36% MAPR] is currently working as intended and that Service members continue to have ample access to necessary credit.
  • Credit cards, auto loans, and personal loans are widely available at risk-based rates under a 36 percent MAPR.
  • To date, “the Department has no indication that Service members and their families lack adequate access to necessary, responsible credit.”
  • The DoD “takes no position on the merit of any change to lower the maximum MAPR rate under 30 percent.”
  • A MAPR limit of 28 percent would likely have no impact on servicemembers’ access to credit cards, assuming card issuers meet exemptions for eligible bona fide fees when calculating the MAPR.
  • A MAPR limit of 25 percent may cause general card issuers to no longer offer cards to one-quarter of servicemembers (those with near-prime, subprime, and deep subprime credit scores) or to amend their terms and conditions to comply with a 25 percent limit.  A limit of 28 percent could have a similar impact on private label credit cards for all servicemembers.
  • A MAPR limit of 28 percent on small-dollar personal loans would bring such products in line with existing rules governing federal credit unions, where such products continue to be widely available.
  • Assuming limits consistent with these findings, the DoD “would anticipate no negative impact on readiness or retention, even if some creditors choose to no longer offer credit to borrowers covered by the MLA.”

In its response to the report, the American Financial Services Association (AFSA) takes issue with the DoD’s assertions in the report that (1) the MLA and MAPR “support Service members and families by ensuring they are not subject to unfair credit practices that can negatively impact financial readiness and, in turn, military readiness,” and (2) the MAPR “places a reasonable limit, with a long regulatory history, on the cost of credit that prevents covered borrowers from becoming trapped in a cycle of debt.”

AFSA states that the DoD’s assertions “fl[y] in the face of data and independent reports released over the past year – some about active military servicemembers – that confirms the severe harm that rate caps impose, particularly on the very men and women the Pentagon claims to support.”  AFSA cites the National Foundation for Credit Counseling 2020 financial readiness survey of servicemembers which reported:

Over three-quarters of active duty servicemembers (78 percent) have taken out a loan in the past year….However, the type of loan has changed dramatically.  This year, 31 percent of active duty servicemembers have taken out a cash advance or payday loan, compared to only 13 percent in 2019.  This represents an even more dramatic shift since 2014, when just six percent of active duty servicemembers reported taking out such loans.

AFSA questions why the DoD, “in a serious study that considers the financial health of its target audience and the efficacy of rate caps,” would not have highlighted “such a troubling trend.”  It notes that a reason cited by military personnel for turning to predatory lenders is the lack of access to other credit products and that this tracks with other research by other federal agencies.  In particular, AFSA notes that “the Federal Reserve, the Consumer Financial Protection Bureau’s own taskforce [on Federal Consumer Financial Law], banks, non-bank lenders and credit unions all say the same thing: Interest rate caps at 36% or below are unworkable and harm the people these arbitrary caps are intended to protect.”

AFSA calls the DoD’s report “unmoored from reality” and states that because of the DoD’s refusal to release data on the effects of the 36% MAPR, the DoD’s statements in the report “ring hollow.”

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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