Pentagon Proposal Would Constrict Credit

The Defense Department’s proposed restrictions on credit for service members goes too far, trade groups representing banks and credit unions said yesterday in a comment letter. Not only would the proposed rule constrict mainstream credit options for members of the military and their families, it would create technological and compliance hurdles that would impede lending across the country, regardless of the borrower’s military status.

In the comment letter, the trade groups noted that the Department of Defense (DoD) offered no evidence for covering mainstream products such as credit cards, student loans and installment loans under the Military Lending Act, which was intended to target tax refund anticipation loans, payday loans, car title loans and other predatory products not generally offered by depository institutions.

The groups urged DoD to exempt depository institutions from the rule, warning that its idiosyncratic Military APR cap (encompassing even low-rate credit cards) and “vague and uncertain prohibitions” could force banks and credit unions out of the military market -- thus reducing access to mainstream credit for service members.

The proposal would also impose massive compliance burdens on all banks, whether they serve military customers or not. While today service members and their families must proactively identify themselves as such, DoD would require lenders to screen all applicants for military status. This requires checking each applicant at least twice in a Pentagon-run database -- but the database is frequently unavailable, which would mean “virtually all new consumer lending comes to a standstill.”

Read the letter.