When the Military Lending Act was introduced in 2007, it aimed to prevent predatory lenders from gouging military personnel with exorbitant interest rates and mountains of fees. While those protections have proven to be successful in many ways, lenders have since learned how to work around specific limits of the law. Now, attorneys general from 22 states are asking the Department of Defense to do more to shield servicemembers from unscrupulous lenders.

New York Attorney General Eric Schneiderman and Illinois AG Lisa Madigan submitted a letter [PDF] to the Dept. of Defense signed by 20 other state attorneys general urging the branch to strengthen a set of proposed revisions to the MLA.

The proposed revisions, which were submitted in September, were aimed at providing more comprehensive protections to servicemembers, including the closure of loopholes regularly used to expose servicemembers to abusive financial practices.

While the AGs applauded the DoD’s effort in their letter, they believe more should be done.

In particular, the AGs point to two weaknesses in the proposed revised regulation:

• an overly broad exemption for fees that may be charged in excess of the MLA’s 36% interest rate cap;
• a failure to regulate sham secured loans that are structured to evade MLA protections.

While the proposed revision keeps the current 36% cap on Military Annual Percentage Rate for loans, it would exempt any “bona fide fees” if they are “reasonable and customary.”

According to the AG’s letter, this change would “open a wide door through which abusive fees of creative lenders may pass.”

With regard to the revisions’ failure to tighten the exemption for secured loans, the AGs say they have found predatory lenders to peddle consumer loans that are nominally secured by collateral, but that in practice are disingenuous vehicles for “abusive practices Congress sought to ban.”

As an example, the letter cites the fact that the MLA specifically prohibits cash loans backed by allotments from the servicemembers’ paychecks and access to their checking accounts. However, some lenders have been able to evade this protection by making loans with security interest on a consumer item that is worth far less than the amount of the loan.

As a result, the AGs write that lenders typical recourse for a $3000 loan is not the $650 TV securing it, but the allotments and checking account sweeps that are otherwise made illegal by the MLA.

To further their point, the officials cite recent cases in which vendors lured servicemembers “to purchase household electronics and other items at 300% markups through predatory financing” at rates that far exceed the MLA cap of 36%.

Those loans were found to be almost exclusively backed by allotment payments and checking account access – practices specifically banned though MLA, the letter states.

“Preying on those who serve in our armed forces is despicable,” Attorney General Schneiderman says in a statement. “Unfortunately, servicemembers make tempting targets for predatory lenders because they have steady paychecks, many are young, and it can be difficult for them to challenge abusive lenders from overseas.”

While the AGs argue that the DoD could do more to prevent unscrupulous lenders from targeting servicemembers, the Department recently took steps to eliminate many of the most often exploited aspects of military members’ finances.

Back in November, the DoD announced that starting on January 1, 2015, servicemembers will be prohibited from using new allotments to purchase, lease or rent personal property, including vehicles, appliances and consumers electronics

Just last week, the Consumer Financial Protection Bureau announced a settlement against a company that targeted servicemembers with electronics and other technological purchases.

In that case, the company – Freedom Stores, Inc. – used illegal tactics to collect debts, including filing illegal lawsuits, debiting consumers’ accounts without authorization, and contacting servicemembers’ commanding officers.

Under the settlement, Freedom Stores, Inc. and its related entities and operators must provide more than $2.5 million in consumer relief.

A.G. Schneiderman Leads 22 State Coalition Calling For Stricter Regulations To Protect Service Members From Predatory Lending [New York Attorney General Eric Schneiderman]

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