Department of Defense Releases Report to Congress on Interest Limit on Military Loans Act | Ballard Spahr LLP

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Department of Defense (DoD) issued a report to the House Committee on Armed Services for the impact of a Military Annual Percentage Rate (MAPR) cap of less than 30% on military readiness and loyalty. The DoD, in consultation with the Treasury Department, was required to submit the report under the National Defense Authorization Act for fiscal year 2021.

The report includes the following highlights:

  • The DoD “believes the MLA” [36% MAPR] is currently working as intended and service members will continue to have adequate access to required credit.
  • Credit cards, auto loans, and personal loans are widely available at risk-based interest rates below a MAPR of 36 percent.
  • To date, “the ministry has no evidence that service members and their families do not have adequate access to the necessary, responsible credit”.
  • The DoD “takes no position on the merit of a change to bring the maximum MAPR rate below 30 percent”.
  • A MAPR limit of 28 percent would likely have no impact on service member access to credit cards, provided the card issuers meet the exceptions for eligible bona fide fees when calculating the MAPR.
  • A MAPR limit of 25 percent could cause general card issuers to stop offering cards to a quarter of service members (those with near-prime, sub-prime, and deep-sub-prime credit scores) or change their terms and conditions by 25% – Percentage value to correspond to limit. A limit of 28 percent could have a similar impact on private label credit cards for all service members.
  • A 28 percent MAPR limit for small dollar personal loans would bring such products in line with existing rules for federal credit unions, where such products remain widespread.
  • Assuming the limits are in line with these results, the DoD would “expect no negative impact on willingness or deductible even if some creditors choose to stop offering loans to borrowers covered by the MLA”.

In his response to the report, The American Financial Services Association (AFSA) denies the DoD’s allegations in the report that (1) the MLA and MAPR “assist service members and families by ensuring they are not exposed to unfair credit practices that adversely affect the business community financial readiness, and in turn military readiness ”and (2) the MAPR“ puts a reasonable limit on borrowing costs with a long regulatory history that prevents covered borrowers from becoming trapped in a debt cycle ”.

AFSA states that the DoD’s claims “fl[y] Given the data released last year and independent reports – some on active service members – confirming the grave harm the rate cap is doing, particularly to the men and women, that the Pentagon claims to support. ”AFSA cited the poll from the National Foundation for Credit Counseling 2020 on Service Member Financial Eligibility, reporting:

Over three quarters of the active population (78 percent) took out a loan in the past year … The type of loan, however, has changed significantly. This year, 31 percent of active soldiers took out a cash advance or payday loan, compared with just 13 percent in 2019. This is an even more dramatic change since 2014, when just 6 percent of active soldiers said they had taken out such loans.

The AFSA questions why the DoD did not highlight “such a worrying trend” “in a serious study that considers the financial health of its target audience and the effectiveness of interest rate caps.” It notes that one reason given by military personnel for turning to predatory lenders is lack of access to other credit products, and this is in line with other research by other federal agencies. In particular, the AFSA notes that “the Federal Reserve, the Consumer Financial Protection Bureau’s own task force” [on Federal Consumer Financial Law], Banks, non-bank lenders and credit unions all say the same thing: interest rate caps of 36% or below are impractical and harm the people who are supposed to protect these arbitrary caps. “

AFSA calls the DoD report “detached from reality” and states that the DoD’s statements in the report “sound hollow” due to the DoD’s refusal to provide data on the impact of the 36% MAPR.


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