Payday loan firms have been exploiting loopholes in the Military Lending Act capping interest rates at 36 percent to gouge troops and their families, the Consumer Financial Protection Bureau (CFPB) charged in a report released Monday.
"The current rules under the Military Lending Act are akin to sending a soldier into battle with a flak jacket but no helmet," said Richard Cordray, the bureau's director. "To give our troops full-cover protection, the rules need to be expanded."
The 36-percent rule of the legislation, which is implemented by the Defense Department and enforced by the bureau, doesn't currently apply to payday loans with initial terms in excess of 91 days, or to auto title loans in which the covered duration is less than 181 days.
"This means creditors can easily avoid the Act's interest rate cap by simply making the initial term of a payday loan longer than three months," the report said.
Unscrupulous lenders can also get around the auto loan provisions of the Act by making the contract term for an auto title loan longer than 181 days.
The report cited the example of a lender in Illinois who set up a 12-month contract term for an auto title loan for a service member's spouse.
"Because it was longer than 181 days, the current Military Lending Act rules did not prohibit the lender from charging an APR of 300 percent," the report states. The service member's spouse ended up paying $5,720.24 to borrow $2,575, it states.
Existing regulations under the Act also do not cover payday loans with an initial balance of more than $2,000. For any payday loan above that amount, lenders can charge more than the 36 percent rate, the report said.
The CFPB cited the example of a California company that lent $2,600 to a service member and charged an APR (annual percentage rate) of 219 percent. The service member paid $3,966.84 to borrow the $2,600 for one year, the report said.
In a letter to Defense Secretary Chuck Hagel, Holly Petraeus, head of the CFPB's Office of Service Members Affairs, backed Pentagon proposals to close the loopholes in the legislation.
Under the proposals, any length payday loan for any amount would be covered by the 36 percent cap.
In her letter, Petraeus said the proposed changes would "help to level the playing field and provide more consistent protection for service members across the country in their credit transactions."