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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Jul 30, 2012

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Leaders within the Department of Defense are reviewing the possibility of expanding the legal interpretation of the Military Lending Act. The Act placed a 36 percent interest rate cap on short-term loans made to military personnel and their families.

The Act also limited credit that could be offered to military personnel that was not secured by vehicles—unlike car title loans which are backed by vehicle-based collateral.

When creating the Act, the Department of Defense limited their regulations to cash advance loans, car title loans, and refund anticipation loans. The Act is limited to “closed-end” financing which is an advance that is offered over a fixed term. Unfortunately, “open-end” financing is not regulated by the Act, which some payday and car title loan lenders have taken advantage of.

“Open-end” financing is financing that does not have a fixed term or ending date. For example, credit cards do not typically stop lending money after one month, while other loans, such as short-term loans and mortgages, must typically be repaid in full at the end of a pre-determined term.

However, the Consumer Federation of America (CFA) discovered that certain car title loans lenders along with some online payday lenders were exploiting the regulation’s limited definitions in order to dodge the Act’s regulatory powers.

The Military Lending Act only regulates car title loans that have 181 day terms. According to the CFA’s report, lenders side-stepped this restriction by offering loans with terms in excess of 181 day terms, thus rendering their products as “open-ended.”

Army Col. Paul Kantwill, director of the office of legal policy in the Office of the Undersecretary of Defense for Personnel and Readiness, said that “the report concludes that the Military Lending Act has had the desired effect of curtailing the use of payday, vehicle title and refund anticipation loans by service members and their families. The overriding theme of the report, however, is that we have achieved much but we have much work to do.”

Findings by Department of Defense officials agree with the CFA’s discovery.

“While they concur that the act has largely stamped out the majority of abuses, they still report seeing payday loans and auto title loans charging more than the statutory cap on interest… or lenders modifying products or procedures to avoid falling under that act,” said Col. Kantwill.

The Department of Defense intends to survey financial counselors and attorneys to learn more about the situation.

Kantwill defended the military’s original decision to not include “open-end” financing in the Act’s regulations.

“Everything that we do in the department and in this industry, I think, has to be balanced in making sure that we do have some accessibility to credit for people who may not otherwise qualify,” said Kantwill.

The decision making process is still ongoing and the Department of Defense has announced that it will give advance notice in order to obtain feedback from several sources regarding changes that could affect financing options for soldiers.

Despite the current review of the Military Lending Act’s current policies, the decision on how they should be changed and when they should be changed may ultimately not be decided by the military. The Senate’s version of the National Defense Authorization Act, if approved later this year, will restrict “open-end” financing as well as “closed-end” financing for cash advance loans, car title loans, and refund anticipation loans.