Curbs On Military Payday Loans Cover Narrow List Of Products

Team Infidel

Forum Spin Doctor
Wall Street Journal
April 10, 2007
Pg. 7

By Damian Paletta
WASHINGTON -- A long-awaited Pentagon proposal to curb high-cost lending to military-service members appears likely to affect a wide range of federally regulated banks and credit unions but cover only a very narrow list of products.
A draft of the proposed regulations, which are designed to apply a new law on loans to members of the military, doesn't exempt big banks by name, as the industry wanted. But it does tailor narrowly the affected products, which means that a large number of bank products, such as credit cards, would avoid tighter scrutiny from the Defense Department.
The proposed rules are aimed at preventing financial-services companies from offering some high-cost loans to military-service members and their families. A law passed by Congress last year gave the Pentagon authority to fine financial companies that make high-cost consumer loans to military personnel.
The new law was aimed mainly at payday loans -- short-term products that might carry very high fees -- as well as other loans that use a borrower's car title as collateral and tax-refund anticipation loans that often carry high fees. The law said lenders couldn't charge more than a 36% annual interest on these products to service members, though such restrictions wouldn't cover individuals unconnected to the military.
Tony Colletti, executive vice president of the Community Financial Services Association of America, a trade group that represents payday lenders, disputed the argument that payday lenders target military bases. He said service members make up only 1% or 2% of the industry's customers.
"For that 1% or 2%, if they take away the payday-loan option, that is going to leave the military with fewer [financial services] options," he said.
Payday loans are offered by small, one-branch offices and some large, publicly traded firms. Many outlets are set up near military bases. Banks generally don't offer these products, but some of their higher-cost short-term products could breach the 36% level after factoring in fees.
Since the law passed in October, the banking industry has fought aggressively to limit the number of lenders and products that come under scrutiny.
Though the draft doesn't limit the former, industry officials said it appears that many mainstream products, including credit cards and home-equity loans, likely won't be covered by the new interest-rate cap. "I think the intent is to ensure there is no collateral damage to other financial products," said Fred Becker, president and chief executive officer of the National Association of Federal Credit Unions, an industry trade group.
Several thousand service members have lost security clearances in recent years because of debt-related problems. Defense Department officials have offered financial-education classes but felt more needed to be done. The agency has said most recruits come straight from high school with little education in financial matters.
"The department equates financial readiness with mission readiness," the draft says. Once published, the public will have 60 days to comment on the proposal.
Unlike some proposals that are changed dramatically before becoming official, the Defense Department is expected to stay close to its proposal before the rule goes into effect Sept. 1.
 
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