AG Coakley Calls for Stricter Regulations to Protect Service Members from Predatory Lending
Multistate Letter Urges Department of Defense to Strengthen Military Lending Act Regulations
BOSTON –Attorney General Martha Coakley today joined a coalition of states in urging the U.S. Department of Defense to strengthen regulations implementing the federal Military Lending Act (MLA).
AG Coakley, together with 21 other state attorneys general, sent a joint letter praising the Department of Defense for closing loopholes in the current rules, but highlighting limitations in the revised regulations that could leave service members exposed to common abusive lending practices.
“While the proposed Military Lending Act rules are an improvement to help further protect service members, we are concerned about loopholes that still present the risk of abusive fees and high interest rates,” AG Coakley said. “Our office is committed to protecting the rights of active duty service members and veterans from predatory lending and financial abuse.”
The MLA was intended to shield service members from predatory lending practices by capping interest rates and fees on loans to service members. Rules implementing the MLA were adopted in 2007 and defined the types of lending products subject to the MLA protections. However, these rules only covered certain lending products, and unscrupulous lenders quickly adjusted their lending products to avoid the law’s consumer protections. In response, on September 29, 2014, the Department of Defense published new proposed regulations that will provide more comprehensive protections for service members.
The attorneys general raise two areas in the proposed MLA regulations that could be strengthened: an overly broad exemption for fees that may be charged in excess of the MLA’s 36 percent interest rate cap, and a failure to regulate certain secured loans that are structured to evade MLA protections.
The proposed regulations include a new exemption for so-called “bona fide fees” from the calculation of the 36 percent cap. The attorneys general point out that the 36 percent cap already far exceeds national averages for APR on both fixed and variable rate credit cards, and that new fee exemption will “open a wide door through which abusive fees of creative lenders may pass.”
The letter also raises concerns that the new rules fail to tighten the exemption for secured loans. Such loans are exempt from key MLA protections, but this exemption has been widely abused. Predatory lenders often peddle consumer loans that are nominally secured by collateral. As a result, these loans become a vehicle for abusive practices that Congress sought to ban. The letter also notes that service members are particularly vulnerable because unpaid debts can affect their security clearance, and potentially their military career.
The threat of predatory loans targeting service members is not a hypothetical one. In July, AG Coakley along with the federal Consumer Financial Protection Bureau and 12 other states, secured a settlement with Rome Finance, providing more than $92 million in debt relief to more than 23,300 affected United States service members worldwide subject to predatory lending contracts. Rome Finance offered credit to consumers purchasing electronic goods typically sold at mall kiosks near military bases or online retailers, with the promise of instant financing with no money down. Instead, Rome Finance allegedly failed to provide accurate disclosures for payments, and deceptively understated or hid high interest rates on the loans. Under the settlement, Massachusetts received an estimated $650,000 in relief to more than 90 service members.
AG Coakley has been a national leader in bringing action against predatory and unfair loans on behalf of consumers in Massachusetts. For more information on her work in protecting homeowners in Massachusetts, please visit the AG’s website.
The letter to the Department of Defense was signed by the attorneys general of Arkansas, California, Connecticut, Delaware, Florida, Hawaii, Illinois, Indiana, Iowa, Kentucky, Maine, Maryland, Massachusetts, Minnesota, New Mexico, New York, North Carolina, Pennsylvania, Rhode Island, Tennessee, Vermont, and Washington.