As U.S. soldiers face continuing demands in the call to protect their country, starting October 1 they gain an extra measure of protection from a lingering financial threat to their own families.
The federal Military Lending Act will take effect Monday, and will bar predatory lenders from gouging military families with no faxing payday loans that trap borrowers in debt and typically carry 400 percent annual interest rates.
The new law caps interest at 36 percent for certain payday, auto title, and refund anticipation loans made to military families.
“The 36 percent cap will slow the predatory lenders down,” said Jean Ann Fox, director of consumer protection for the Consumer Federation of America (CFA). “And the law says they can’t hold onto the service member’s personal check or have electronic access to their bank account as collateral for this type of loan. The threat of the lender depositing the borrower’s check, which would often not clear the bank, has been a key way to trap borrowers in loans that they end up paying back many times over in interest.”
The law will not cover all high-cost products - predatory lenders have designed some loans to get around restrictions in states. For example, fast payday loan lenders in Illinois restructured 350 percent interest loans as 121-day installment loans to get around the 120-day minimum loan term established in that state.
Military would not be protected from this product under the new rules, which apply to only loans of 91 days or less.
“Still, as long as the [cash advance payday loan] lenders don’t contort their products to try to end-run the protections for military, this law will protect our soldiers and their families from the worst abuses,” said Fox.
Lawmakers passed the Military Lending Act after the Pentagon reported that predatory practices weaken the military, and that debt issues threaten the security clearances of military personnel.