The Department of Defense and Payday Loans

The Department of Defense and Payday Loans

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Over the past several years, members of Congress and the Department of Defense (the Department) were notified about the negative effects exorbitant high interest payday loans were having on service members and their families. In 2006, the Department made a report to Congress Senate Banking Committee tilted “The Report of Predatory Lending Practices Directed at Members of the Armed Forces and their Dependents.” This study explored the pitfalls and the ramifications of exorbitant high interest payday loans directed at service members and their families. The study also found that at least 13 to 19 percent of service members that borrow money on pay day loans are paying Annual Percentage Rates (APRs) starting from 350 percent to 800 percent.
Instead of charging interest, lenders use nominal fees for lending money. This fee varies from $10 to $30 for each $100 service members borrow and is applicable for 14 days. After the 14 day grace period is over, and if the loan is not paid in full, service members must pay the fee again until the loan is paid off. If the fee is $15 per $100 borrowed, that equals an APR of 391.07%. These payday loans have been widely known as “debt traps” because of the inability for service members to pay the balance in full.
In response to the Department report, Congress delegated the department rulemaking amending 32 Code of Federal Regulation (CFR) section 232, “Limitations on Terms of Consumer Credit Extended to Service Members and Dependents” by implementing “John Warner National Defense Authorization Act for Fiscal Year 2007”, section 670. This part defines the different types of credit transactions for borrowers and creditors alike which are covered by the regulation and provisions found in 10 U.S.C 987, “Terms of consumer credit extended to members and dependents: limitations.” This essay will describe and critique the rule making process of limiting consumer credit to service members and their families, using the Department of Defense (the Department) amendment regulation under 32 Code of Federal Regulations (CFR) part 232, it will also touch on the process of the unintended consequences of implementing such regulation and finally it will illustrate whether or not the Department met its intended goals.
Introduction to the Limitations of Consumer Credit
The Federal Administrative Procedure Act of 1946 (APA) allows agencies to promote rationality and lawfulness in their decision making process which prevents decisions that are arbitrary or capricious 5 U.

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S.C. 706. When dealing with administrative law, agencies decisions may be either “formal” or “informal”. The formal rulemaking process operates much like a trail-like proceeding where everything is recorded for developing regulations. On the other hand, informal rulemaking process involves public hearing comments which are used for developing regulations.
While there is no set definition of administrative rules agencies must follow, the Federal APA act defines them as “the whole or the part of an agency statement of general or particular applicability and future effect designed to implement, interpret, or prescribe law or policy describing the organization, procedure, or practice requirements of an agency.” 4 U.S.C 551 Nevertheless, the Department complied with all eight steps of the APA act during the informal rulemaking process.

The Department initiatives resulted from Congress delegating the statutory mandate John Warner National Defense Authorization Act for Fiscal Year 2007”, section 670, which provided the Department the rule making authority to develop a regulation to assist service members and their families. As required under the APA Act, 5 U.S.C . 552, and with the assistance of other federal agencies the Department released a draft regulation for public comment to analyze the overall impact high cost predatory lending, low cost alternatives to high interest loans, the efforts to provide financial education to service members and their families and recommendations for limitations. Some federal regulators perceived this draft regulation as a benefit to service members and their families while some consumer advocates saw the draft language as too narrow, they also express their concern about the prohibition of military installments loans.
The Department conceptualizes and defines the different types of installment loans in such a way to prevent future acts of predatory lending practices. While there is no uniformed definition of predatory lending, the Department has adopted the language of the Federal Deposit Insurance Corporation (FDIC) Office of Inspector General Audit Report 06-111, June 2006, which reads, “Characteristics associated with predatory lending include, but are not limited to, (1) Abusive collection actions (2) balloon payments with unrealistic payments terms, (3) equity-stripping associated with repeat financing and excessive fees, and excessive interest rates that may involve steering a borrower to a high cost loan.”
The Department also identified three types of loans that would have limitations or prohibit in the provisions of Limiting Consumer Credit to Service Members and their families: 1) excluded military installment loans 2) curbed payday and car title loans and 3) restricted refund anticipation loans. Under the new rule, payday and car title loans interest rates will be capped at the maximum 36 percent Military Annual Percentage Rate (MAPR). The Department acknowledged this narrow definition will not allow room for ambiguity but they made sure the definition is as close to the APR definition file under the Truth-in-lending Act.
These types of loans are good choices for the Department to consider implementation of and compliance with the regulation because many of these loans involves exorbitant high interest rates and its widely known they are most detrimental among service members. Eliminating refund anticipation loans was very important because there are many alternatives that can expedite service members’ tax returns at no cost. For example, most active duty military bases have volunteer income tax programs, which is a nonprofit organization that provides free tax preparation services to service members and their families.
The Department also recognized that amending this statue may have unintended consequences for its service members and their families in terms of narrow definitions. For this reason, the Department heard from different consumer groups through public comment which was received through the Federal Register notice DoD-2006-OS-0216 and through external meetings requested by the Department. The term “creditor” as defined in the statue is a broad definition and which includes entities as well as individuals. “Covered Borrower” is defined as a regular member of the Armed Services and the member’s spouse or child. This definition makes it clear to lenders it’s just not service members who is protected by this statue but the service members spouse’s and child that was obligated during the time of the transaction. “Consumer Credit” is defined as payday loans, car loans, and tax refund anticipations loans, but it does not include line of credit extended to service members for personal or family items such as home equity line of credit, mortgage payments and personal loans.
These narrow definition terms of the Department rules is an example of how an agency’s rulemaking authority could prevent unintended consequences while granting the intended recipients the protection provided by the statute. However, the Department efforts to solicit information from the public about its rule making process were feasible, but could be better. The majority if not all of the unsolicited and solicited public comments were obtain from consumer advocacy groups, credit unions, and bankers. The Department should have place a more emphasis on obtaining information from service members and their families. In addition, the term “consumer credit” is defined too narrow because it prohibit lenders from extending credit to service members in the terms of personal loans, mortgages, and home equity line of credit. The Department should have conducted surveys of service members and collect the data on what products they use frequently from credit lenders before defining the terms of specific actions.


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