DOD proposal limits high-interest loans

DOD proposal limits high-interest loans

	Published : Wed, 11 Apr 2007 02:56 By : Agencies Print this Story

RICHMOND, Va. (AP) - Servicemembers and their dependents could pay no more than 36 percent annual interest on payday loans, vehicle title loans and refund anticipation loans under a preliminary draft of a law intended to stop high-interest loans to the military.

The U.S. Department of Defense's draft proposal, a copy of which was obtained by The Associated Press on Tuesday, was a blessing for banking and consumer lending groups that had feared the law would be interpreted so broadly that it would include many common practices such as credit cards, overdraft protection on checking accounts and direct bill payment.

The draft will be published Wednesday in the Federal Registrar, and the public will have 60 days to comment before it is finalized and goes into effect Oct. 1.

'I think we are both on the same wavelength that we want the bad practices to end and we don't want military families to become second-class financial customers,' said Wayne A. Abernathy, executive director of financial institutions policy and regulatory affairs for the American Bankers Association.

Congress placed the APR cap on all consumer credit loans last year, giving the Department of Defense the job of deciding what practices fell under Congress' definition of 'consumer credit.'

Most of the debate before Congress focused on payday lenders, which offer small-scale, short-term loans for a fee that customers must repay when they receive their next paycheck. Borrowers who cannot settle up at payday often 'roll over' the loan repeatedly, leading to more charges that quickly add up.

Most payday lenders charge around $15 per $100 borrowed, pushing annual interest rates on two-week loans close to 400 percent. A 36 percent cap would limit fees to $1.38 for each $100 borrowed.

'We are not going to make loans at $1.38, so on the effective date there won't be payday loans available to military people,' said Steven Schlein, a spokesman for the Community Financial Services Association, an industry trade group.

'Military personnel deserve the same financial choices as any other citizens.'

Several groups, including the National Military Family Association, say credit cards, overdraft protection charges and other high cost lending practices are also detrimental and should be included.

The draft left open the option for Congress to go back and add other lending practices.

'There's a reason why the military went to Congress and asked for help with predatory lending, because the servicemembers were really suffering under this burden of debt that many of them were getting themselves into,' said Holly Petraeus, senior program consultant for the Better Business Bureau's Military Line.

Patraeus, whose husband Gen. David Patraeus commands all U.S. forces in Iraq, said servicemembers are good targets for payday lenders because they have a steady source of income and many are financially inexperienced.

Associated Press Writer Natasha T. Metzler contributed to this report from Washington.