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New protective payday loan law now in effect

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Posted: Monday, October 1, 2007 12:00 pm | Updated: 4:55 pm, Wed Aug 15, 2012.

By Don Bolding

Killeen Daily Herald

A new Defense Department regulation intended to shield military personnel from excessive interest and fees and other predatory lending practices by payday loan operations goes into effect today.

Soldiers and military families who make use of short-term loans, such as payday loans, vehicle title loans and tax refund anticipation loans, should see a change in the way those loans are handled.

The changes are intended to give borrowers more protection, said Holly Petraeus, director of the Better Business Bureau Military Line in Washington, D.C.

"I applaud this development," Petraeus said Saturday from her home.

The National Defense Authorization Act of 2007 establishes broad lines of protection for military personnel to safeguard morale, family life and combat readiness.

Petraeus explained in a summary of the act that the Defense Department's interpretation of the law for servicemembers attempts to weed out excessive fees and interest rates and practices that trap borrowers in cycles of debt that are difficult to escape.

To help further explain the new regulation and its impact on servicemembers, Petraeus will be among the presenters at the Financial Readiness Seminar scheduled from 9:30 a.m. to 4 p.m. Friday at the Killeen Civic and Conference Center.

Petraeus is married to Gen. David H. Petraeus, the top U.S. military commander in Iraq.

Geraldine Walsh of SaveAndInvest.org and Sarah Shirley of Military Saves are also scheduled to appear at the seminar and business showcase. The event is sponsored by the Fort Hood Herald, Central Texas Workforce Centers, Central Texas Better Business Bureau, Fort Hood Family Housing, Fort Hood National Bank and Pioneer Services.

As part of the measure to improve lending practices, the military regulation sets a maximum 36 percent military annual percentage rate on loans, which includes "interest, fees, credit service charges, credit renewal charges, credit insurance premiums and fees for credit-related products sold in connection with a transaction," Petraeus said.

Lenders also will have to provide a "covered borrower identification statement" to be signed by each borrower they know to be on active military duty for 30 days or more or a dependent of such a person.

"There's a profusion of payday lenders around every military installation," Petraeus said. "The Center for Responsible Lending says 65 percent of borrowers come back for repeat financing on the same loan. They return to the lender over and over on the same principal because they can't get it paid off."

Petraeus and Central Texas BBB executive director Richard Kitterman singled out payday loans as the worst problem.

In a summary of the new law, Petraeus identified three types of loans that the new practice will address:

Payday loans: closed-end credit with a term of 90 days or fewer in which the amount financed does not exceed $2,000 and the borrower provides a post-dated check or debit authorization to secure the loan.

Vehicle title loans: closed-end credit with a term of 181 days or fewer that is secured by the title to a motor vehicle.

Tax refund anticipation loans (RALs): closed-end credit in which the borrower gives the creditor the right to receive all or part of the borrower's income tax refund or agrees to repay the loan with the proceeds of the refund.

"DOD officials chose payday and vehicle title loans because they feel that they contribute to a cycle of debt, and RALs because they are 'the second most prevalent high-cost loans used by service members and because alternatives that can expedite their tax returns are available, generally at no cost," Petraeus wrote.

RALs are attractive because qualifying individuals can get the equivalent amount of their refunds, minus fees and interest, within 24 hours of application. Fees and interest are usually deducted from the amount of the loan with no further liability unless the Internal Revenue Service withholds the refund.

The catch now is that enforcement is up to state regulatory agencies, and the Defense Department now has to work with each state to arrange enforcement procedures. It was not immediately clear what state agencies might be involved in Texas.

Federal reports leading to the current law assert that small-loan practices tend to aggravate debt problems and put borrowers' key assets at risk and sometimes involve abusive collection tactics.

To meet the real need for small loans, she said, the Federal Deposit Insurance Corp. and others are encouraging banks and credit unions to develop small-loan products, and the armed services are working on allowing unit commanders to authorize small loans.

Kitterman, a former Army officer, said he can't estimate the extent of unethical practices because "people who get these loans are usually embarrassed when they get into trouble with them. They feel they shouldn't have done it in the first place, and I think they're even more reluctant to go to their commanders than to civilian authorities or advisers."

He said he would be active in educating military personnel about the new rules.

Petraeus said the BBB Military Line began in 2003 because of the prevalence of predators in all kinds of business targeting military personnel. She said the group works with family resource units throughout the services.

Contact Don Bolding at dbolding@kdhnews.com or call (254) 501-7557

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