Pentagon takes steps to avert predatory lending

WASHINGTON (Reuters) - The Pentagon on Monday implemented new rules to protect U.S. service members and their families from high-cost, short-term loans, saying stress from such loans can hurt military readiness.

The regulation, prompted by a law passed by Congress last year, limits the fees and interest that creditors can charge on payday, vehicle title, and tax refund anticipation loans. Those three kinds of loans have high interest rates and short payback terms.

The Defense Department said payday and vehicle title loans often led to a cycle of ever-increasing debt, and refund anticipation loans came at a high cost to the borrower.

"The financial stress service members and their families suffer in turn causes a decline in military readiness," it said in a statement.

"We equate financial readiness with mission readiness," said David Chu, under secretary for personnel and readiness. "Preparing for emergencies is an important step forward and vital to avoiding predatory practices and a cycle of debt."

Chu said the new rule was part of a broader effort to help military employees become more financially savvy. The effort includes increased access to financial planning, a variety of courses, and encouraging service members to create a $500 emergency savings account.

The new rule caps the annual percentage rate charged to service members and their families on payday loans, vehicle title loans, and refund anticipation loans at 36 percent. The method for calculating the rate encompasses all fees required at the time of obligation, with very few exceptions.

It also requires lenders to give service members and covered family members a written and oral disclosure statement informing them of their rights before they sign a loan.

Consumer advocates said predatory lenders could easily tweak their loan terms to dodge the new rules.

Lauren Saunders, managing attorney with the National Consumer Law Center, said the final rules too narrowly defined problem loans and weakened the federal law enacted to protect military families from abusive lenders.

"Perhaps unintentionally, the Pentagon has provided predatory lenders with a set of very specific instructions: 'How to avoid the cap and keep charging 400 percent interest,'" Saunders said.

She said the Pentagon should tighten and expand the rules, which exclude credit cards, overdraft loans, and all forms of open-end credit as well as military installment loans.