CFPB Updates Guidelines for Protecting Service Members in the Payday Lending Market

The Consumer Financial Protection Bureau (CFPB) has released updated guidelines for its examiners on how to identify consumer harm and risks related to Military Lending Act (MLA) violations.

The CFPB is committed to ensuring that payday lenders comply with the Act, which provides greater protections for military families, including capping annual percentage rates at 36 percent. The new guidelines are included in an updated exam manual that the CFPB released for the short-term, small-dollar lending industry.

Through its enforcement and supervisory work, the CFPB will be scrutinizing lenders to make sure they are following the MLA requirements when they make short-term, small-dollar loans to service members and their dependents. Specifically, payday lenders must follow the law for all closed-end loans of $2,000 or less and with terms of 91 days or less. These requirements 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 service members, unless the new transaction results in more favorable terms for the service member.
  • No signing away of service member rights: The MLA prohibits lenders from making service members waive their rights under the Service Members Civil Relief Act or other state or federal laws that provide critical consumer protections. The MLA also prohibits lenders from requiring service members 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 service members 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 service members control over how their income is spent.

The revised Short-Term, Small-Dollar Lending Procedures can be found at: http://files.consumerfinance.gov/f/201309_cfpb_payday_manual_revisions.pdf.

 

Questions? Contact the Compliance Hotline: 1.800.546.4465, compliance@nwcua.org.

Posted in Compliance.