February 28, 2007
Dr. David S. C. Chu Under Secretary of Defense Personnel and Readiness 4000 Defense Pentagon Washington, DC 20301-4000 Re: Regulations to Implement the Military Lending Provisions of the John Warner National Defense Authorization Act for Fiscal Year 2007 Dear Dr. Chu: The undersigned groups have submitted detailed comments in response to the Department of Defense’s request for input concerning the regulations to implement the John Warner National Defense Authorization Act for Fiscal Year 2007 (the “Military Lending Act,” or “MLA”). We would like to reiterate our concerns about the possibility that the regulations will exempt certain credit products, regardless of their cost, or put the burden on servicemembers to identify themselves and to opt-in to the Act’s protections. Opt-In The effectiveness of the MLA will be seriously undermined if the Act only applies when service members “opt in.” To begin with, the Act flatly prohibits certain credit practices; it does not say that the practices are permissible unless the service member asks for legal protections. An opt-in requirement is also inconsistent with the prohibition on waivers of protections. A service member could effectively waive protection of the Act by not identifying him or herself. Even if they do identify themselves and ask for protection when taking out credit, service members will likely find it difficult to prove that they did so. An opt-in requirement will also permit payday lending to continue with a wink and a nod. The payday lender can simply say to a potential customer: “We cannot give you any cash if you tell us that you are military, but we can if you don’t say anything to us.” Moreover, financial literacy training has not stopped service members from going to payday lenders, and an education campaign will not reach all members or ensure that they take the time to figure out how to secure the protections of the MLA. Anyone who has struggled to correct an error on a bank, credit card or loan statement can attest to the difficulties of getting through a large bureaucracy. Service members working to serve their country have far too much to deal with to be given the burden of figuring out the paperwork to receive the MLA protections.
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Exemptions for Groups of Products As we described in our comments, it is reasonable to exempt lower cost products from some of the Act’s strictures based on the price of the product. But we have serious concerns about any exemption for a class of products that is not tied to price. Any total exemption for a group of institutions or products will create a loophole that will permit destructive high cost lending to the military to continue, and will be exploited by those who will simply change the form of their product. We discuss below some of our concerns about specific product groups. Overdraft “protection” Payday lenders have argued with some justification that it is overdraft charges that force service members to resort to payday loans. Banks and credit unions charge $18 to $35 fees for even the tiniest of inadvertent overdrafts on ATM and debit card transactions that are approved without telling the customer that they are overdrawn. These fees rack up, roll over, and plunge the customer into a cycle of debt in the same way that payday loans do. Indeed, in many ways they are worse than payday loans, because the interest rates can be much higher and the fees are incurred without disclosures or consent. Bounce loan programs did not exist 8 to 10 years ago but they have exploded as they have become a profitable product. Yet if banks and credit unions are willing to allow even credit-impaired customers to overdraw their accounts up to a certain limit, then they can offer a more reasonable overdraft line of credit at the same limit with interest up to 36%. Otherwise, they should deny overdraws, just like service members should be prohibited from going to payday lenders. Small limit, higher interest lines of credit for credit-impaired customers could be developed in the same way that institutions have developed small loan programs. But financial institutions will not have the incentive to stop this abusive product and offer a reasonable alternative if it is exempt from the MLA Indeed, if the Department chooses to focus on “payday loans,” it should define those loans as short term, high fee credit that includes these bounce loans. Credit Cards The problem with exempting credits cards is illustrated by a Navy Marine Corps Relief Society case that we learned about the day after the comments were due. Trying to rebuild credit in her own name during a divorce, a sailor opened a new 9.9% APR credit card with a $250 credit limit. The very first day, before any purchases, she was hit with $178 in fees. When she then bought $85 in gas and other items, she incurred over limit
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fees. She made no more purchases, but within 65 days of opening the card, she had a total of $295 for $85 in purchases, roughly a 2,000% rate. Even traditional credit cards can lead to the debt spirals that prompted Congress to pass the MLA. In fact, we suspect that credit card debt plays a bigger role in the debt problems of service members who have lost their security clearances than do payday loans. If a service member falls behind in payments, late fees, over limit fees, returned payment fees, high default APRs, and other default-triggered fees can send the total interest cost through the roof, making it impossible to dig out of debt. The MLA does not prohibit these fees or penalties for default, but it does cap them at 36% -- still a very high interest rate, but one that has a limit and at least preserves some hope that the debt can be repaid. Indeed, it is the service members who are having trouble managing their finances who visit payday lenders and who are Congress’s target in the MLA. For mainstream credit cards that are not designed as predatory products, DOD may choose to give the creditor some initial freedom to charge default fees, with the burden on service members to come forward and request a reduction down to 36%. But excluding credit cards altogether will leave a gaping hole in the protections for service members struggling with their finances. Debit Cards Setting aside the problems with overdraft fees on debit cards, which are discussed above, debit cards also pose the potential to become a payday replacement. First Bank and Trust, previously First National Bank of Brookings, was one of the first banks to originate payday loans through partnerships with payday lenders and one of the last to leave the field. Even after the Office of the Comptroller of the Currency forced it out of the payday-lending business in 2003, the bank switched to a state charter, and continued originating the loans until last year, which it was pressured to stop by the Federal Deposit Insurance Corp. As described in the attached American Banker article, First Bank has now begun making short term low balance loans through its Revel debit card. The card comes loaded with fees: an initial 8% to 10% of the loan amount; a monthly fee of $4.95 to $9.95; $5.95 initially and $3.95 to reload the card; $1.50 to pay bills; and 50 cents to check a balance at an automated teller machine – perhaps designed to encourage the $25 overdraft charges. A consumer borrowing $400 to be repaid over three months would pay a minimum of nearly 70% interest, but that rate could increase substantially depending on how the card is used. In an electronic age, debit cards could be the next form of payday loans. Installment Loans
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If “consumer credit” is defined to include only very short term loans, it could omit longer term installment loans that can also be a destructive, high cost product. The DOD report described the problems with military installment loan companies, who load their interest rates with ancillary fees. The internet site Purposeloans.com, which offers loans from First Bank of Delaware, offers a three month loan at an APR of 350%. ACE Cash Express also offers bank-funded installment loans over 20 weeks at 391% APR. Conclusion We appreciate the effort that the Department is making to stop destructive high cost credit and to protect service members’ access to lower cost credit. We believe that the Department can exempt reasonably priced lower cost products from some of the Act’s requirements, and can put the burden on service members to identify themselves to those lower priced creditors. But we fear that it would be a terrible mistake to exclude classes of products entirely, regardless of the cost, or to permit abusive predatory lending to continue as long as the service member fails to invoke the MLA. Yours very truly, National Consumer Law Center Consumer Federation of America Center for Responsible Lending National Association of Consumer Advocates Consumers Union
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