Fact Checked

Predatory military lending could go undetected under weakened oversight

Ankle view of military service members in uniform, on a sunny day.Image: Ankle view of military service members in uniform, on a sunny day.
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The Consumer Financial Protection Bureau is feeding military families to the loan sharks, critics say.

The New York Times reported this week that the agency is planning to roll back MLA supervisory examinations, a proactive oversight measure that helps identify lenders who have violated the Military Lending Act.

The MLA, which applies to active-duty service members and covered dependents, prohibits most lenders from charging interest rates higher than 36%. While the CFPB will still bring individual cases against lenders violating the interest cap, its push to weaken supervisory examinations that proactively oversee the MLA has been met with opposition.

Senate Democrats fired back at the decision, accusing the consumer bureau of asking its examiners to “turn a blind eye” to predatory lenders.

“The CFPB should not be abandoning its duty to protect our service members and their families,” states the strongly worded letter to CFPB Interim Director Mick Mulvaney, which was signed by all 49 Senate Democrats.

Advocates for military borrowers think the changes could allow predatory lenders to target military service members.

“Given the opportunity, predatory lenders will target military service members and pull them into horrific debt traps,” says Scott Astrada, federal advocacy director at the Center for Responsible Lending. “We applaud these senators for calling on the CFPB to fulfill its obligation of stopping loan sharks from preying upon service members and their families.”

What does this mean?

Congress passed the Military Lending Act in 2006 — protecting active-duty military personnel, their spouses and their dependents — as a means of addressing lending practices seen as posing a risk to service members and to military readiness.

The Military Annual Percentage Rate (which the MLA set at 36%) factors in not only the interest rate, but also typically includes finance charges, application or participation fees, credit insurance premiums and other borrowing costs.

Former CFPB Director Richard Cordray, who left the agency in November 2017, said he saw these supervisory examinations as a way to “help ensure that service members and their families are dealt with in a fair and safe manner.”

The Department of Defense implemented the MLA and the CFPB historically has taken the lead in enforcing the measure to protect military families from predatory lenders, with CFPB examiners conducting routine examinations of military lenders to ensure compliance with the MLA.

“Protecting service members is a priority for the CFPB,” said Cordray in 2016.

But the CFPB has gone in a different direction under Mulvaney’s leadership. Mulvaney argues that the agency doesn’t have the authority to conduct supervisory examinations of lenders under the MLA. So instead of the CFPB proactively conducting examinations to identify predatory lending practices, the bureau will largely rely on military families to alert the agency themselves by filing a formal complaint.

This appears to be part of a larger effort by the Trump administration to roll back Obama-era regulations. 

Why should you care?

Stopping these supervisory examinations could again put active-duty military personnel and their families in jeopardy of predatory lending practices, critics say.

Many service members enter the military at a young age before they have a chance to learn about personal finance or build credit. Strapped for cash, they may not recognize a predatory lender until it’s too late.

Some critics say these predatory lenders could undermine military readiness by putting military personnel in financial distress. And with the CFPB planning to roll back oversight of such lenders, even more rests on service members’ shoulders.

“For our service members, especially those who are deployed overseas facing hostile fire, it is unreasonable to place the burden of detecting and reporting MLA abuses on service members,” Senate Democrats wrote in their letter to Mulvaney.

“They should be given every opportunity to focus squarely on their missions.”

What can you do?

Remember, the Military Lending Act is not changing.

But if the CFPB stops conducting routine examinations to uncover abuses, you’ll have to be more proactive about knowing your rights and reporting abusive activity to the bureau.

Consider borrowing from trustworthy banks that have a good reputation for dealing with military families.

Even better? If you’re able to, we recommend that you start an emergency savings account, so that the next time you’re in a sticky financial situation you won’t need to turn to a lender to help you out.


About the author: Tim Devaney is a personal finance writer and credit card expert at Credit Karma. He’s a longtime journalist who prides himself on being a good storyteller who can explain complex information in an easily digestible wa… Read more.