The Department of Defense (DoD) published a report to the House Committee on Armed Services regarding the impact of a military annual percentage rate (MAPR) cap of less than 30% on military readiness and military retention. The DoD, in consultation with the Treasury Department, was required to provide the report under the National Defense Authorization Act for fiscal year 2021.
The report includes the following highlights:
- The DoD “believes that the MLA [36% MAPR] is currently functioning as intended and that Service members continue to have ample access to the necessary credit.
- Credit cards, auto loans, and personal loans are widely available at risk-based rates below an MAPR of 36%.
- To date, “the ministry has no indication that Service members and their families do not have adequate access to necessary and responsible credit.”
- The DoD “takes no position on the merits of a change to lower the maximum MAPR rate below 30%”.
- A 28% MAPR limit would likely have no impact on service members’ access to credit cards, assuming card issuers meet the exemptions for qualifying bona fide charges when calculating the MAPR.
- A 25% MAPR limit may cause card issuers to stop offering cards to a quarter of service members (those with near-prime, subprime, and deep subprime credit scores) or change their terms and conditions to comply. to a limit of 25%. limit. A 28 percent limit could have a similar impact on private label credit cards for all service members.
- A 28 percent MAPR limit on small personal loans would bring these products into compliance with existing rules governing federal credit unions, where these products continue to be widely available.
- Assuming limits consistent with these conclusions, the DoD “would not predict any negative impact on readiness or retention, even if some creditors choose to no longer offer credit to borrowers covered by the MLA.”
In its response to the report, the American Financial Services Association (AFSA) disputes the DoD’s assertions in the report that (1) the MLA and MAPR “support members of the Service and their families by ensuring that they are not subjected to harsh unfair lending practices that can negatively impact financial readiness and, in turn, military readiness, ”and (2) the MAPR“ imposes a reasonable limit, with a long regulatory history, on the cost of credit that prevents borrowers covered by getting trapped in a cycle of debt ”.
AFSA states that DoD’s claims “fl[y] in the face of independent data and reports released over the past year – some on active military personnel – that confirm the serious damage rate caps impose, especially on the men and women the Pentagon claims to support. AFSA cites the National Foundation for Credit Counseling 2020 Military Financial Readiness Survey which reported:
Over three-quarters of active duty military personnel (78%) took out a loan in the past year … However, the type of loan has changed dramatically. This year, 31% of active duty military personnel took out a cash advance or payday loan, up from just 13% in 2019. This represents an even more dramatic change from 2014, when only 6% of active duty military personnel reported having taken out such loans. .
AFSA wonders why the DoD, “in a serious study that considers the financial health of its target audience and the effectiveness of price caps”, would not have highlighted “such a disturbing trend”. He notes that one reason cited by military personnel for turning to predatory lenders is lack of access to other credit products and that this ties in with other research conducted by other federal agencies. In particular, AFSA notes that “the Federal Reserve, the Consumer Financial Protection Bureau’s own working group [on Federal Consumer Financial Law], banks, non-bank lenders and credit unions all say the same thing: Interest rate caps of 36% or less are unenforceable and harm the people those arbitrary caps are meant to protect. “
AFSA calls the DoD report “out of touch” and says that due to DoD’s refusal to release data on the effects of 36% MAPR, the DoD’s claims in the report “ring hollow.”