Thursday, November 09, 2006

Congress passes act to limit payday, predatory loans

By Steven Chucala
Special correspondent

On Sept. 30, Congress passed the Military Personnel Financial Services Protection Act to curtail unreasonable credit interest rates paid by military personnel and to establish mandatory requirements for the sale of insurance and investment advisor services on military installations worldwide.

The law is the result of complaints by money borrowers who are unable to repay loans resulting in dramatically escalating interest rates with each passing due date.

The federal government seeks to protect military personnel from predatory lending practices by limiting interest rates to no more than 36% annual percentage rate along with other safeguards and requirements to include the sales of insurance on military installations.

This article addresses what are often referred to as “payday loans” in which civilian and military individuals who are hard pressed for money sign away their future paychecks for loans with high interest rates and then find they are unable to pay back the loan, which causes the interest rate to multiply. It is unclear how widespread this lending practice is with the military but numerous complaints resulted in federal legislative intervention even though no illegal conduct was committed by the lending firms.

The law has the following characteristics:

It applies to transactions involving the extension of consumer credit to a service member or a dependent and becomes effective on Oct. 1, 2007.

It applies to all payday loans and where the Truth in Lending Act applies, including tax refund anticipation loans, credit card agreements, etc.

It does not apply to residential mortgages and loans for the purpose of purchasing personal property that secures the loan. (Installment loans for furniture, cars, homes, boats, jewelry, credit card agreements that include taking a security interest in the purchased property, etc., are exempt.)

Servicemembers called to active duty for a specified period that is 30 days or less, and Guard and Reserve members who are not on active duty, are not covered.

The law imposes the following limitations:

• No interest greater than 36 percent annual percentage rate
• No rollovers or renewals to a borrower by the same creditor
• No waiver of the borrower’s recourse rights under the law
• No mandatory arbitration provisions
• No use of checks or other methods to access the borrowers savings or bank account
• No use of the title of a vehicle as security (except for vehicle purchase loans)
• No requirement to use an allotment to repay an obligation
• No prohibitions or penalties on prepayment of a loan.
The impacts of the law are:
• Violations of the statute are punishable as a misdemeanor
• Contracts in violation of the statute are void from their inception
• DoD shall prescribe implementing regulations.

Although the statute seeks to curtail unreasonable interest rates, it does not cure the underlying causes that give rise to the over extended financial conditions military members and their families are creating that cause them to seek high interest rate loans.

Since most “payday” borrowers are financially distressed, have poor credit ratings and are not likely to qualify for low interest loans from commercial banks or credit unions, it remains to be seen if limiting the interest rate by this law will help or further deny loans to military personnel and result in placing them in worse debt difficulty.

The sure way to end predatory lending is to avoid spending above ones needs and ones ability to repay debts as promised.
Limiting loans to 36% APR will not cure the financial difficulties caused by Soldiers competing for the gold in the “Debt Olympics.”

Editor’s note: Steven Chucala is chief of the Fort Belvoir Staff Judge Advocate’s Legal Assistance Division.