CFPB Action Against Payday Lender to be Followed by New Military Lending Act Regulations
On November 20, 3013, the Consumer Financial Protection Bureau announced its first enforcement action against a payday lender. Cash America International was fined $5 million and was ordered to refund $14 million to its borrowers due to violations of the Military Lending Act. This action was made possible by amendments to the MLA signed into law by President Obama in January, 2013, that gave the CFPB new authority to enforce the MLA. Moreover, the CFPB is working with the Department of Defense, the FTC and with federal banking regulators on new regulations that will expand the types of loans covered by the MLA.
MLA regulations currently impose a 36% annual interest rate cap on extensions of “consumer credit”, which is defined only as tax refund loans, certain payday loans, and short-term auto title loans made to active duty service members and their dependents. According to recent testimony before a Senate committee by Holly Petraeus, CFPB Assistant Director with the Office of Servicemember Affairs, “lenders have easily found ways to get outside of the definitions” and have been able to offer high cost longer term auto loans and installment loans, loans in amounts greater than $2,000, and open-end credit. Not surprisingly, the payday lender trade groups oppose expanding the scope of the “consumer credit” definition.
According to a November 22, 2013, article in The New York Times, active military personnel are particularly attractive customers for short-term lenders because they tend to be young, financially inexperienced, and have reliable paychecks. However, these loans can become particularly dangerous for military personnel because the military considers servicemen and women with high personal debt a threat to national security due to the possibility that they could be more easily recruited to commit espionage.
In testimony before the Senate Banking Committee in November, 2013, CFPB Director Richard Cordray indicated that new proposed regulations under the MLA were close to being issued for comment. It certainly appears that the CFPB and the DOD have taken aim at those who make high cost loans to military personnel, and have them squarely in their sights.