Today, the Consumer Financial Protection Bureau (CFPB) released guidelines to its examiners on how to identify consumer harm and risks related to Military Lending Act (MLA) violations when supervising payday lenders. The CFPB is committed to ensuring that payday lenders comply with the Act, which provides greater protections for military families, including capping annual percentage rates at 36 percent. The new guidelines are included in an updated exam manual that the CFPB released today for the short-term, small-dollar lending industry.
“Protecting servicemembers is a priority for the CFPB,” said CFPB Director Richard Cordray. “We will use the authority Congress gave us to enforce the Military Lending Act and to safeguard our men and women in uniform from illegal payday loans.”
Payday loans are typically designed as a way to bridge a cash shortage between pay or benefits checks. Such loans are generally for small-dollar amounts and borrowers must repay them quickly. The Dodd-Frank Wall Street Reform and Consumer Protection Act specifically tasked the CFPB with supervising payday lenders for the first time at the federal level. The CFPB began that work in January 2012.
In 2006, the Department of Defense issued a report concluding that predatory lending practices by payday lenders and other creditors near military bases were a threat to military personnel and their families. In 2007, Congress passed the MLA to help address this problem and the Department of Defense issued rules to implement the law. In general, the law shields active-duty military personnel, active National Guard or Reserve personnel, and their dependents from lending practices that Congress determined should not be tolerated in lending to servicemembers. In 2012, Congress amended the law by, among other things, giving the CFPB the authority to enforce it.
Through its enforcement and supervisory work, the CFPB will be scrutinizing lenders to make sure that they are following the MLA requirements when they make short-term, small-dollar loans to servicemembers and their dependents. Specifically, payday lenders must follow the requirements of the law for all closed-end loans of $2,000 or less and with terms of 91 days or less. These requirements include:
Annual percentage rate capped at 36 percent: Because most payday loans are for several hundred dollars and have finance charges of $15 or $20 for each $100 borrowed, a typical two-week term can equate to an annual percentage rate (APR) ranging from 391 percent to 521 percent. Payday lenders must cap the APR – which incorporates all fees and costs associated with the loan – at 36 percent when lending to servicemembers.
No rolling over of loans: When consumers cannot pay back the loan at the time it is due, borrowers can often pay only the finance charges and renew the loan. This fee does not reduce the amount owed. If a payday loan is rolled over multiple times, it’s possible to pay several hundred dollars in fees and still owe the original amount borrowed. Payday lenders are banned from rolling over loans for servicemembers, unless the new transaction results in more favorable terms for the servicemember.
No signing away of servicemember rights: The MLA prohibits lenders from making servicemembers waive their rights under the Servicemembers Civil Relief Act or other state or federal laws that provide critical consumer protections. The MLA also prohibits lenders from requiring servicemembers to waive their right to seek resolution of any legal claims in court.
No requiring allotments to repay: Under the military allotment system, military personnel can repay their loans by having payments directly deducted from their paycheck before their salary is deposited in their account. When servicemembers pay by allotment, they lose certain consumer protections as well as their flexibility to adjust their budget if a financial emergency comes up. The MLA bans lenders from requiring military members to pay by the allotment system and gives servicemembers control over how their income is spent.
In January 2012, the CFPB published its first short-term, small-dollar lending procedures manual. The field guide describes the types of information that the agency’s examiners gather to: evaluate payday lenders’ policies and procedures; assess whether lenders are in compliance with federal consumer financial laws; and identify risks to consumers throughout the lending process. Risks to consumers resulting from MLA violations are significant and subject to CFPB enforcement.
Today’s revised Short-Term, Small-Dollar Lending Procedures can be found at: http://files.consumerfinance.gov/f/201309_cfpb_payday_manual_revisions.pdf
Congress gave the Department of Defense the authority to define the types of loans covered by the MLA, in consultation with the CFPB and other agencies. In May 2012, the CFPB signed a Joint Statement of Principles with the Pentagon on small-dollar lending. The CFPB looks forward to continuing its strong partnership with the Pentagon to ensure appropriate protections for servicemembers and their families. More information about how the CFPB is protecting servicemembers is at: http://www.consumerfinance.gov/servicemembers/
The CFPB is continuing to study the payday lending market to make it work better for all consumers and honest businesses. As part of this effort, the CFPB issued a report in April on payday and deposit advance loans.