The U.S. government is constantly looking for effective methods to safeguard active-duty military members’ financial and legal rights. Historically, one of the most beneficial laws has been the Servicemembers’ Civil Relief Act, but even this piece of legislation isn’t perfect.
To help further close any loopholes, the U.S. Department of Defense has revamped SCRA military protections associated with another law – the Military Lending Act – in order to offer more comprehensive financial protections for servicemembers. Not only does the final rule for the MLA better protect members of the armed forces from predatory lending, it also addresses a key issue with the SCRA itself.
Final rule set to take effect
In a news release, the DOD outlined the key components of its final rule for the MLA. The rule deals directly with payday loans, vehicle title loans, refund anticipation loans, deposit advance loans and similar lending options. The final rule will go into effect on Oct. 1, 2015. Compliance dates for lenders will be spread out after that date.
“Final rule will take effect on Oct. 1, 2015.”
Key changes in the rule include a 36 percent Annual Percentage Rate limit, including all added products to the initial loan – like credit default insurance, for example. Furthermore, the final rule also broadens the definition of credit, so any closed or open-ended loan is now regulated. Where the old MLA had a very narrow definition of consumer credit, the new rule widens coverage to offer more comprehensive protections for servicemembers.
“This new rule addresses a range of credit products that previously escaped the scope of the regulation, compromising the financial readiness of our troops,” said Deputy Secretary of Defense Bob Work in the release. “Today, with our regulatory and enforcement partners, we stand united in support of our servicemembers and their families.”
Final rule has broad support from government
Following the final rule announcement from the DOD, both the White House and the Consumer Financial Protection Bureau expressed support for the changes.
According to the White House, the old version of the MLA had too narrow a definition of covered loans, which allowed certain lending practices to continue unregulated. Some examples include payday loans over $2,000 or with term limits longer than 91 days. With this final rule, those loans are also covered under the MLA.
CFPB Director Richard Cordray said in a statement that his agency supported the DOD’s final rule.
“Today’s rule will help ensure that American service members get the legal protections they deserve,” he added at the time. “As one of the agencies responsible for enforcing the Military Lending Act, we stand ready to stop illegal lending to military families.”
Final rule addresses SCRA
Furthermore, the MLA final rule also includes a provision addressing SCRA protections afforded to servicemembers. The key change deals with what creditors may, and may not, require.
Under the final rule, creditors cannot require service members to perform these steps, among other changes:
- Participate in mandatory arbitration and legal notice requirements
- Share payroll allotment in order to obtain credit
- Refinance payday loans
- Waive rights under the SCRA (though servicemembers may still elect to waive)
Previously, creditors could ask servicemembers to waive their rights to SCRA protections. That gave more leeway to the lenders, who could then include unfavorable terms, high fees, interest rates and charges without being limited by the SCRA. Now, that is no longer the case, as servicemembers have total control over whether or not they sign a SCRA waiver before acquiring a loan.
Goal is more effective legislation
At the end of the day, the final rule, including the change to the SCRA, are built around a more effective law. The goal for the government is to create a system where those with active-duty military status don’t have to worry about their financial obligations at that time.
Before, the loopholes in the MLA meant that some servicemembers weren’t protected, simply based on the type of credit they had. Ideally, the final rule has closed the loopholes to ensure that all parties have the same protections. This can also be a benefit for lenders, since it removes the variations in the law and ensures the MLA covers all loan types equally, to prevent any confusion.