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Published: December 2011

Senate should enhance consumer credit protections for servicemembers and their families

Coalition: Americans for Financial Reform

Consumer Action joined in sending a letter of support for S. Amdt. 1294 to S. 1867, the Defense Authorization Bill, which would close legal loopholes that allow payday and auto title lenders to bilk military men and women.

Below is the full text of the letter:

We, the following community, civil rights, consumer, religious, and labor groups strongly support Senator Reed’s Amendment to S. 1867, the Defense Authorization Bill, to enhance consumer credit protections for members of the Armed Forces and their dependents, specifically by closing a loophole that allows payday and auto title lenders to continue to prey on military men and women by making loans costing 400% or more in annual interest rate terms.

In 2006, Congress passed the Military Lending Act (MLA) to protect military service members from predatory lending practices after the Department of Defense found that abusive high-cost loans were creating significant financial distress for service members, leading to failed security clearances and ultimately harming military readiness. This Act has resulted in significant reductions in certain forms of predatory lending targeted at service members.

But as time has passed, some lenders have become adept at evading the key protections of the MLA. A primary evasion has been for lenders to simply label their loan an “open-end” line of credit (not currently covered under the Act) instead of a “closed-end” loan (covered under the Act), without making any substantive changes to the loan’ s central abusive features: triple-digit interest rates with full repayment due upon the borrower’s next payday.

Holly Petreaus recently testified that one internet payday lender is reportedly marketing an open- end payday loan with interest rates as high as 584% APR, telling service members it doesn’t have to comply with MLA’s 36% rate cap because the product is an open-end line of credit and claiming: “We believe that your membership in the armed forces entitles you to special treatment . . . . We speak your language.”

This Amendment would achieve the following with respect to military service members covered by MLA and their dependents:

Close the “open-end” loophole for payday and auto title loans, making loans that lenders claim are open-end lines of credit, but that effectively operate as closed-end loans, subject to the Act. The Amendment authorizes DoD to exclude certain open-end credit, like credit cards, from the Act’s scope, as it deems appropriate;

End extremely high-cost overdraft fees on point-of-sale purchases and ATM withdrawals made with debit cards, without impacting service members’ ability to obtain reasonably priced forms of overdraft protection if they desire it. These high fees are triggered when the service member does not have sufficient funds in his/her checking account to complete the transaction, but the financial institution approves the transaction anyway—usually, very small purchases averaging $17 or less—and charges a fee averaging $34 per overdraft transaction, often totaling hundreds of dollars in fees in a single day; and

End overdraft fees triggered solely because a financial institution manipulated the order in which they posted the service member’s transactions. Many institutions re-order transactions from highest to lowest so that the checking account is depleted more quickly; this way, when the service member overdrafts, more transactions are posted after the account is already negative, generating more $34 overdraft fees.

All of these practices have been shown to cause significant financial harm to already struggling individuals. Our service members deserve better. Please support this Amendment.

Lead Organization

Americans for Financial Reform

Other Organizations

Alabama Appleseed Center for Law & Justice | Americans for Financial Reform | Appleseed Arizonans for Responsible Lending | Arkansans Against Abusive Payday Lending | The Bell Policy Center, Colorado | Center for Economic Integrity | Center for Responsible Lending | Citizen Action/Illinois | Coalition on Homelessness & Housing in Ohio (COHHIO) | Community Reinvestment Association of North Carolina | Consumer Federation of America | Consumers for Auto Reliability and Safety | Consumers Union | Corporation for Enterprise Development | Florida Consumer Action | Network Jacksonville Area Legal Aid, Inc. | Maryland CASH Campaign (Creating Assets, Savings and Hope) | Maryland Consumer Rights Coalition (MCRC) | Memphis Responsible Lending Collaborative | Miami Valley Fair Housing Center, Inc., Dayton, OH | Monsignor John Egan Coalition for Payday Loan Reform | Montana Community Foundation | NAACP | National Association of Consumer Advocates (Military Consumer Readiness Project) | National Community Reinvestment Coalition | National Consumer Law Center (on behalf of its low income clients) | National Fair Housing Alliance | National People’s Action | Neighborhood Economic Development Advocacy Project (NEDAP) | Northeast Ohio Legal Services | Policy Matters | Ohio/Ohio CASH Coalition | Raise Kentucky, Member Kentucky Coalition for Responsible Lending | Rural Dynamics, Inc. (RDI) (Great Falls, Montana) | Service Employees International Union | South Carolina Appleseed Legal Justice Center | Texas Appleseed | Texas Baptist Christian Life Commission | Theodore E. Lorenz, Lundy, Flitter, Beldecos & Berger, P.C. | U.S. PIRG | Virginians Against Payday Loans | Virginia Poverty | Law Center Woodstock Institute

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