Payday lenders that loan money to members of the military are being scrutinized more closely by federal examiners under new guidelines on investigating illegal payday loans.
The guidelines were released in September by the Consumer Financial Protection Bureau, or CFPB, to its examiners on how to identify consumer harm and risks related to Military Lending Act violations by payday lenders. Congress gave the CFPB the authority to enforce the federal law last year.
The Military Leave Act, or MLA, caps annual percentage rates for payday loans to military members and their dependents at 36%, prevents loan rollovers, and doesn’t require military personnel to have a loan repayment first deducted from their paycheck before their salary is deposited in their bank account, among other protections.
How payday lenders work
Also called the short-term, small-dollar lending industry, payday loans are typically designed to bridge a cash shortage between pay or benefits checks. They’re usually for small amounts that must be paid back quickly, usually within a few weeks.
In a study of payday lenders, the CFPB found that the loans cost $10 to $20 per $100 borrowed. For example, a $15 fee on a $100 loan equates to an APR of 391% on a 14-day loan. In a study of payday lenders, the CFPB found that the loans cost $10 to $20 per $100 borrowed. For example, a $15 fee on a $100 loan equates to an APR of 391% on a 14-day loan.
The Department of Defense determined in 2006 that payday lenders and other creditors near military bases were a threat to military personnel and their families. Congress passed the MLA in 2007, shielding active-duty military members, active National Guard or Reserve personnel, and their dependents from lending practices deemed illegal by Congress.
In September, the CFPB revised its procedures for investigating if a payday loan is illegal. Payday lenders must follow the law for all closed-end loans of $2,000 or less and with terms of 91 days or less.
The requirements include:
Annual percentage rate capped at 36%
A two-week loan can equate to an annual percentage rate of 391% to 521%, according to the CFPB.
The federal law requires payday lenders to cap the APR for military members at 36%, which incorporates all fees and costs associated with the loan.
No rolling over of loans
For consumers who can’t pay back the loan when it’s due, they can often pay only the finance charges and renew the loan. The fee doesn’t reduce the amount owed.
If a payday loan is rolled over multiple times, a borrower could pay several hundred dollars in fees and still owe the original amount borrowed.
The CFPB guidelines ban payday lenders from rolling over loans for servicemembers unless the new transaction results in more favorable terms for the servicemember.
No signing away of servicemember rights
The federal law prohibits lenders from making military members waive their rights under the Servicemembers Civil Relief Act or other state or federal laws that provide consumer protections.
The MLA also prohibits lenders from requiring servicemembers to waive their right to seek resolution of any legal claims in court.
No requiring allotments to repay
Under the military allotment system, military personnel can repay their loans by having payments directly deducted from their paycheck before their salary is deposited in their account.
When they pay by allotment, they lose certain consumer protections as well as their flexibility to adjust their budget if a financial emergency comes up. The MLA bans lenders from requiring military members to pay by the allotment system and gives servicemembers control over how their income is spent.
