The Department of Defense today put into effect a new regulation that protects service members and their families from high-cost, short-term loans.
The regulation limits the fees and interest that creditors can charge on three specific types of loans: payday loans, vehicle title loans, and tax refund anticipation loans. These three products were targeted because they have high interest rates, coupled with short payback terms.
Payday loan and vehicle title loans can often lead to a cycle of ever-increasing debt. Refund anticipation loans provide seven to 14-day advances on tax refunds, but at a high cost to the borrower. The financial stress service members and their families suffer in turn causes a decline in military readiness.
The new regulation is part of wide-ranging DoD efforts to increase ‘financial literacy’ among servicemembers and their families. These efforts include 24/7 access to confidential financial planning and counseling, a variety of financial readiness training courses, improving the availability of small low-interest loans from financial institutions, promoting the practice of setting aside a $500 emergency savings account, and educating service members on the availability of counseling, grants, loans and other services from military aid societies.
“We equate financial readiness with mission readiness,” said David S. C. Chu, under secretary of defense for personnel and readiness. “This is part of a larger effort to create a culture that encourages our service members and their families to develop sound financial strategies. Preparing for emergencies is an important step forward and vital to avoiding predatory practices and a cycle of debt.”
The regulation limits the annual percentage rate charged to servicemembers and their families on payday loans, vehicle title loans, and tax refund anticipation loans to 36 percent. The method for calculating the annual percentage rate encompasses all fees required at the time of obligation, with very few exceptions. All financial institutions – without exception – are subject to the new regulation.
Chu said the process of developing the new regulation also resulted in stronger relationships with federal regulatory agencies. DoD is working with the National Association of State Regulators to develop similar collaborative processes. Currently, 27 states have committed to oversight and enforcement measures.
The regulation also requires that service members and their covered family members receive both a written and oral disclosure statement informing them of their rights before they become obligated on a consumer credit transaction.
"This statement tells members of the armed forces that they have several other options to get emergency funds that are far less financially hazardous than high-cost, short-term loans,” said Leslye A. Arsht, deputy under secretary of defense for military community and family policy. “The protection the regulation offers is not a wall preventing a service member from getting assistance, rather it is more like a flashing sign pointing out danger and directing the borrower to a safer way of satisfying immediate financial needs."
In addition to counseling available through a service member’s chain of command, legal assistance office or military aid society, DoD offers several online resources to service members and their families.
“Military HOMEFRONT” (http://www.militaryhomefront.dod.mil/
), offers reliable quality of life information to help servicemembers and their families, leaders and service providers in the ‘Personal Finance’ section of the Web site.
The final regulation in effect today was released August 31, 2007. It can be viewed online at: