Coalition for Responsible Lending
Consumer Federation of America
National Association of Consumer Advocates
National Consumer Law Center
DOD’s Weak Proposed Regulations on Military Lending Act
Undermine Congressional Efforts to Protect Troops Against Predatory Lending
The Department of Defense issued draft regulations to interpret the Talent/Nelson
Military Lending Act (“MLA”)1 that fail to adequately protect Service members and their
families from payday loans and other forms of abusive lending and fail to implement the
law. The Act, enacted by Congress last year, imposed a 36 percent interest rate cap on
credit; prohibited loans secured by personal checks, debits, vehicle titles or allotments;
required clear cost disclosures; banned mandatory arbitration and unfair contract terms;
and extended the protections of state lending laws to military families stationed within
The Department’s proposed rules limit the protections of the MLA only to extremely
narrowly-defined payday, auto title and refund anticipation loans. They exclude
installment loans Congress meant to cover, and, further, invite lenders the rules are
intended to cover to skirt those rules. The net effect of the proposed rules is to seriously
undermine the law and fail to protect Service members and their families.
Payday Lenders will Likely Exploit Potential Loopholes in the Draft Regulations to
Predatory lenders have a long track record of exploiting legal loopholes to evade
consumer protections. DOD did not accept the recommendation2 of NCLC, CFA, CRL
and others to include a general prohibition on tactics designed to evade the law as well as
suggested language to avoid foreseeable manipulations. The draft regulations define
covered loans so narrowly that evasions are more than likely. In fact, existing models to
evade state laws can easily be the model for such evasions.
A payday loan is defined as: (1) closed-end credit; (2) term of 91 days or less; (3)
loan up to $2,000, and (4) based on a contemporaneous check or debit authorization.
A title loan is defined as: (1) closed-end credit; (2) term of up to 181 days; (3) secured
by title to motor vehicle owned by a covered borrower.
10 U.S.C. § 987.
See Comments of the National Consumer Law Center, Consumer Federation of America, Center for
Responsible Lending, Consumers Union, National Association of Consumer Advocates Regarding
Limitations on Terms of Consumer Credit Extended to Service Members and Dependents (Feb. 5, 2007),
available at http://www.nclc.org/action_agenda/military/content/MLA_DODFeb7.pdf (“Consumer
A refund anticipation loan is defined as: (1) closed-end loan, (2) secured by all or
part of the borrower’s income tax refund.
Payday and auto title loans are defined as only closed-end loans. A
payday lender in Pennsylvania structures its 300 to 600 percent loans as
open end credit to avoid state rate caps. A major auto title lender casts its
364 APR loans as open-end credit in Virginia.
Payday loans are covered only if their term is 91 days or less. Payday
loans in Illinois now have a 121-day term to avoid an Illinois limit on 120-
Payday loans are only covered if there is a “contemporaneous” check
or debit authorization and exclude bank offset rights. Lenders may be
able to stagger the timing of the transaction.
Lenders might attempt to exploit the exemption for secured, purchase-
money loans by use of a sale/leaseback devise on an item already
Payday lenders could characterize their rollover fees as late fees, which
are not limited or included in the 36% cap.
Auto title loans must be “secured by the title,” but lenders may hold the
keys to a vehicle rather than the title itself.
May encourage Service members to lie about their status and permit
lenders to ignore evidence that the borrower is military.
DOD’s Definition of “Consumer Credit” Excludes Many Predatory Loans
The protections of the Military Lending Act only apply to products defined by the
Department of Defense as “consumer credit.” These proposed rules define
“consumer credit” products as payday, auto title or refund anticipation loans, and
do so only in very narrow, easily evaded, terms.
All other lenders and forms of credit will be free to charge exorbitant interest
rates, to deprive Service members of access to the courts, and to evade state
Military installment loans are exempted entirely from the law, despite two
provisions on the Military Lending Act – credit insurance fees and protection of
state lending laws – aimed at those loans.
The proposed rules do not apply to open-end credit, such as credit cards, or credit
not subject to Truth in Lending Act, such as bank overdraft loans, or to payday-
type loans that are over 91 days or not secured with a “contemporaneous”
April 30, 2007