Matz to DOD: Don’t go Loco on Payday Loan Reforms

May 6, 2015 at 8:31 am 1 comment

No one celebrates Cinco de Mayo like the Irish, so it’s only natural that NCUA Chairwoman Debbie Matz went to Ireland to ratchet-up her spot-on criticism of the Department of Defense’s well intended but ill-conceived proposal to cap most consumer credit at a military APR of 36%. The proposal sounds nice, but as she made clear in her speech before a gathering of the Defense Credit Union Council’s Overseas Subcommittee, it would do more harm than good when it comes to providing credit union services to members of the armed forces.

As I explained in a previous blog, the military is concerned about continued lending abuses. It argues that there are too many ways to get around restrictions on Payday loans, vehicle title loans, and refund anticipation loans. Its solution is to cap the APR on most consumer loans to active duty military personnel at a military APR of 36%. That means that there would now be a regular APR and a Military APR (MAPR). The MAPR would be calculated differently than the regular APR. It would include certain fees currently excluded from the calculation of APR under Regulation Z.

Just how restrictive is the proposed APR calculation? As Matz explained in her speech yesterday “We have done the math and found that when fees are included, many credit unions’ short-term loans would exceed the 36 percent Military APR limit. Unfortunately, the Military APR limit would be violated even using what we know are reasonably priced products designed to provide affordable alternatives to predatory loans.” This means that the payday loan alternatives offered by credit unions such as Pentagon Federal would violate these regulations. Is this a good thing? Only if you don’t want members of the armed forces to get access to reasonably priced credit.

Chairwoman Matz also used the speech to urge the CFPB not to implement payday loan protections that are so restrictive that they also inhibit the ability of credit unions to offer legitimate shorter term loans. She was commenting on what my colleague Mike Carter has described as the Bureau’s proposed proposal to impose ability-to-repay underwriting requirements on payday loans. I’m not as concerned about the Bureau’s proposal at this point. A formal regulation has not been put forward and the CFPB commented with approval on NCUA’s short term lending alternatives even as it proposed payday lending restrictions.

Chairwoman Matz deserves credit for forcefully criticizing the MAPR proposal first in a comment letter and now in yesterday’s speech. But I will take the criticism one step further. Even if credit unions are excluded from its grasp, establishing a two-tiered lending system with separate lending criteria for the military and the general public is a dumb idea that will make it impossible for all but the largest institutions to cost effectively offer consumer credit to military personnel.

Recently, the House Armed Services Committee narrowly defeated a proposal sponsored by Democrat Tammy Duckworth to delay any further rules in this area pending additional review. This is unfortunate. If the DOD goes forward with its MAPR regulation in anything close to its existing form, I’ll bet that Congress will have to overturn the regulation within two years. As soon as the best intentions of consumer advocates clash with reality, no one is going to be in favor of a regulation that makes it more difficult to give consumer credit to members of our armed services.

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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