Written by JiJi Bahhur, Regulatory Compliance Counsel
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) specifically tasked the Consumer Financial Protection Bureau (CFPB) with supervisory authority over payday lenders. And after the Department of Defense concluded that predatory lending practices by payday lenders were a threat to military personnel and their families, Congress passed the Military Lending Act (MLA) – which provides greater protections for military families – and gave the CFPB the authority to enforce it as well. As part of its efforts, the CFPB, earlier this month, issued guidelines to its examiners on how to identify consumer harm and risks related to MLA violations when supervising payday lenders.
The new guidelines (updated examination procedures) apply to the short-term, small-dollar credit market, known as payday lending. More specifically, the special protections offered by the MLA apply to closed-end payday loans of $2,000 or less with terms of 91 days or fewer. Quoted from the CFPB’s news release, the requirements that payday lenders must follow include:
- “Annual percentage rate capped at 36 percent: Because most payday loans are for several hundred dollars and have finance charges of $15 or $20 for each $100 borrowed, a typical two-week term can equate to an annual percentage rate (APR) ranging from 391 percent to 521 percent. Payday lenders must cap the APR – which incorporates all fees and costs associated with the loan – at 36 percent when lending to servicemembers.
- No rolling over of loans: When consumers cannot pay back the loan at the time it is due, borrowers can often pay only the finance charges and renew the loan. This fee does not reduce the amount owed. If a payday loan is rolled over multiple times, it’s possible to pay several hundred dollars in fees and still owe the original amount borrowed. Payday lenders are banned 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 MLA prohibits lenders from making servicemembers waive their rights under the Servicemembers Civil Relief Act or other state or federal laws that provide critical 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 servicemembers 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.”
Through its enforcement and supervisory work, the CFPB will be scrutinizing lenders to make sure that they are following the MLA requirements when they make short-term, small-dollar loans to servicemembers and their dependents.