The Department of Defense issued new guidance about rules designed to protect service members from predatory lenders, but banks and credit unions are still confused.
Neither mainstream banks nor credit unions were the target of Military Lending Act rules that were announced in July 2015, and go into effect this year and next. Instead, the rules were designed to stop payday lenders, title loan lenders and others that targeted cash-strapped service members and their families with loans with exorbitant interest rates that were easy to get and difficult to escape.
Yet, credit union and banking organizations have watched the rule-making process carefully for unintended consequences, and issued critiques of a Defense Department guidance statement made public Friday.
“This helps us out in a lot of ways, and we appreciate that, but it is something that is still problematic,” Nessa Feddis, senior federal counsel for the American Bankers Association, said.
Mike McLain, CUNA's senior federal compliance counsel, said the current form of the rules harms service members because it puts up barriers to credit unions offering non-predatory loans.
“Credit unions are trying to make loans to service members that help service members,” he said.
For example, McLain said the rules and Defense Department clarifications still do not address what constitutes an “ancillary product,” leaving open the interpretation of what must be included in APR calculations to remain under the 36% APR ceiling set by the legislation. Lenders might be skittish about offering car loans because they would worry that warranties might be considered an ancillary product.
The Military Lending Act now also covers open-end loans, including credit cards. The credit card rules go into effect in October 2018, but could be delayed up to one year.
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