Protective lending regulation in effect Published Oct. 11, 2007 By Col. Harris Kline Air Force Materiel Command WRIGHT-PATTERSON AFB, OHIO -- The Department of Defense put into effect a new regulation last week that protects servicemembers and their families from high-cost, short-term loans. The regulation limits the fees and interest that creditors can charge on three types of loans: payday loans, vehicle title loans and tax refund anticipation loans, products that can often lead to a cycle of ever-increasing debt. Starting October 1, a new federal regulation prohibits creditors making payday loans, vehicle title loans and tax refund anticipation loans to active-duty servicemembers and their dependents with annual percentage rates over 36 percent. Over the last several years, DoD has been increasing financial education for members of the military. Over 40 percent of military service personnel are under the age of 25, and many are not experienced in financial matters. Thus they are easy targets for predatory lenders. A 2005 survey of servicemembers rated personal finances more stressful than deployments, health concerns, life events and personal relationships. The most common traps have been payday loans, vehicle title loans, military installment loans, tax refund anticipation loans and rent-to-own purchases. Financial stress not only affects the well-being of individual servicemembers but also the operation of the armed forces as a whole. Financial strain is so systemic that many members have become unqualified for strategic security clearances, thereby compromising the ability of the armed forces to conduct their missions. As a result of these concerns, the DoD developed a strategic plan to reduce the stress related to financial problems, increase the personal savings of its members, decrease its members' dependence on unsecured debt and decrease the prevalence of predatory lending practices. The final rule regulates the terms of payday loans, vehicle title loans and tax refund anticipation loans when extended to active-duty servicemembers and their dependents, known as 'covered borrowers'. These three products have high interest rates, coupled with short pay back terms. The new legislation limits the annual percentage rate - APR - on these loans to 36 percent. All fees and charges, with few exceptions, are included in the calculation of the annual percentage rate. The rule also prohibits contracts requiring the use of a check or access to a bank account, mandatory arbitration and unreasonable/onerous legal notice. Any credit agreement subject to the regulation that fails to comply with this regulation is void from inception. To protect against these stiff penalties, creditors offering payday loans, vehicle title loans and tax refund anticipation loans may ask loan applicants to sign a declaration statement regardless of military affiliation. The rule further provides that a creditor or assignee that knowingly violates the regulation shall be subject to certain criminal penalties. Making a false statement when completing this declaration is a crime. Individuals in need of cash should seek assistance from a financial counselor, through the local Military Aid Society Office or through the installation bank or credit union. Protective provisions within The John Warner National Defense Authorization Act for Fiscal Year 2007 (Warner Act) were signed into law in October 2006 and became effective October 1, 2007. Also known as the Talent Amendment, the new legislation will protect servicemen and women and their families from some of the worst practices of loan sharks. Section 670 of the Warner Act, "Limitations on Terms of Consumer Credit Extended to Service Members and Dependents," is designed to curtail abusive practices associated with payday lending and other predatory lending practices targeted at military personnel. The law applies to both servicemembers and their dependents. It stipulates that the APR of a covered extension of credit cannot exceed 36 percent, and it mandates disclosures and terms mirroring the Truth in Lending Act. It also includes a provision against any state or federal preemption, unless those laws provide even greater protections. Other provisions include the following prohibitions: Lenders may not roll over, renew, refinance or consolidate credit unless the new transaction results in more favorable terms to the borrower. Borrowers cannot be required or allowed to waive the right to legal recourse. In the case of dispute, lenders cannot require the borrower to submit to arbitration or impose onerous legal notice provisions. The Warner Act provides specific definitions of the terms "interest," "APR" and "consumer credit." For example, its definition of APR includes all fees and charges connected to the loan, including single-premium credit insurance and other products sold in connection with the transaction. Some of these fees and charges are exempt from standard APR calculations so the new method of calculation is being called the "Military APR" or "MAPR." Prior to becoming obligated through the transaction, each applicant must be provided with a clear and conspicuous "covered borrower identification statement" that must be signed by the borrower. It should be noted that the law does not apply to residential mortgage loans and loans to purchase vehicles. Residential mortgage loans are defined not only as purchase money but also refinancing, home equity loans and home equity lines of credit. For covered loans, servicemembers should expect to receive the following at the loan closing: (1) A disclosure containing the MAPR and the total dollar amount of all charges; (2) Any disclosures required by the Truth in Lending Act; (3) A clear description of the payment obligation; and (4) A "covered borrower identification statement." In addition to financial and legal counseling available through a servicemember's chain of command, legal assistance office or military aid society, DoD offers several online resources to servicemembers and their families: Military OneSOURCE (http://www.militaryonesource.com); Military HOMEFRONT (http://www.militaryhomefront.dod.mil); and Armed Forces Legal Assistance Services (http:// legal assistance.law.af.mil/content/locator/php).