Pentagon official says expect financial rules soon

By John Poirier

WASHINGTON, March 5 (Reuters) - A top U.S. Defense Department official said on Monday a draft set of regulations to determine whether certain financial products would be considered predatory against service members would be issued "soon," but offered no details.

"We recognize legislation to curb predatory practices could have potential unintended consequences on beneficial credit transactions," David Chu, undersecretary for personnel and readiness, told a banking conference.

The Pentagon is drafting rules that would determine which financial products should be subject to a 36 percent cap on interest rates and fees.

Bank trade groups have warned of unintended consequences that could lead to a lack of financial products and services, including credit cards, to military members and their families.

The trade groups are urging the Pentagon instead to draft rules that focus on the concentration of payday lending stores near military bases nationwide. Such lenders often charge triple-digit rates on small loans to customers.

The rules were mandated by a law passed by Congress last year as part of the Defense Department's reauthorization bill and requires the Pentagon to work with federal regulatory agencies and implement them by October 2007.

The Pentagon urged Congress to set the interest-rate cap, concerned that service members are falling deeper into financial debt -- a situation it says distracts troops and hurts their ability to focus on their military missions.

"Assisting service members with their family needs is therefore essential to maintaining a stable, motivated force," Chu said in remarks to a conference hosted by the America's Community Bankers.

U.S. financial regulators say the number of denials of security clearances to military members due to financial problems has soared over the last several years.

Chu said the Pentagon has been working with the regulators and is listening to the concerns from the trade organizations but provided no specifics of the new regulations.

"The Congress provided the department legislation to protect service members and their families from predatory credit practices," he said.

When asked by Reuters when the Pentagon plans to issue rules for public comment, Chu said "soon." When asked to be more specific, he said "not too long" from now.