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.