President Obama Announces Final Rules to Better Protect Service Members from Financial Abuse

President Obama Announces Final Rules to Better Protect Service Members from Financial Abuse on Fifth Anniversary of Signing Wall Street Reform into Law

Rules Mark Next Step in Historic Wall Street Reform Effort by Closing Loopholes in the Military Lending Act to Protect Service Members and Their Families from Predatory Lending

Today, President Obama will announce that the Department of Defense (DOD) is finalizing updated Military Lending Act rules that close harmful loopholes to better protect our troops and their families from financial abuse. For too long, predatory loans have trapped some members of our military in an endless cycle of debt, adding financial strains to families that already bear the burden of defending our country. By distracting our troops with financial challenges or forcing them to leave military service to pay off debts, these abusive loans negatively impact military readiness.

Today’s announcement comes on an important date—the fifth anniversary of the Dodd-Frank Wall Street Reform and Consumer Protection Act. DOD’s actions build on an historic effort to strengthen consumer protections since the President signed the Dodd-Frank Act into law on July 21, 2010. Dodd-Frank created the Consumer Financial Protection Bureau (CFPB), a first-of-its-kind consumer watchdog, which has created strong safeguards for Americans taking out mortgages, paying student loans, using credit cards, and dealing with debt collectors. The Bureau’s enforcement activities have also returned more than $10.1 billion to more than 17 million consumers. Building on that record, the Department of Labor recently proposed new rules to crack down on conflicts of interest in retirement advice, requiring retirement advisers to put their clients’ best interests first.

These reforms are part of a broader effort, creating fairer rules of the road for financial markets, as well as stronger cops on the beat to enforce them.  Wall Street Reform has made our financial system safer, stronger, and more transparent, with the capacity to support the country’s economic growth—and the President is committed to protecting and building on those reforms.

Putting in Place Stronger Military Lending Act Rules to Protect Service Members

·         Today, President Obama announced final rules expanding consumer protections for America’s service members and their families so that our troops can focus on defending our country, not fighting unfair treatment here at home. The Department of Defense finalized new rules under the Military Lending Act (MLA), closing loopholes in the definition of “consumer credit” covered by MLA and extending the Act’s important protections to more loans.

o   Congress passed the MLA in 2006 to protect our troops and their families from predatory lenders, who often target service members by setting up and advertising near military bases. Among other things, the law applies a military annual percentage rate (MAPR) limit on loans made to service members – including all interest and fees associated with the loan – and prohibits lenders from requiring service members to automatically send a portion of their paycheck to the lender, submit to mandatory arbitration, or waive their rights under the Servicemembers Civil Relief Act, which protects active-duty service members from predatory financial practices and eases the legal and financial burdens they and their families face.

o   But previous regulations narrowly defined the loans covered by the Act’s protection, leaving large loopholes and allowing predatory lenders to continue targeting service members. For example, the protections did not apply to payday loans that were above $2,000 or borrowed for longer than 91 days, as these loans were not within the definition of “consumer credit.” Payday lenders exploited these loopholesand continued to disproportionately set up shop near military bases.  As the Pew Charitable Trustshas found, households that use payday loans are about twice as likely as the general public to include a military service member.

·         Today’s new rules will protect service members by closing these loopholes. The rules do so by:

o   Defining “consumer credit” covered by the Act to include all payday loans, vehicle title loans, refund anticipation loans, deposit advance loans, installment loans, and credit cards extended to service members.  Through this change, these loans are now all subject to the MAPR cap and other MLA protections.

o   Counting charges for most “add-on” products (e.g., credit default insurance) in calculating the military annual percentage rate, so lenders cannot skirt the rules by imposing extra fees. 

·         The rules will protect service members from predatory lending while preserving their access to credit.Today’s rules do not limit the access service members have to no-interest loans, grants, and scholarships from the four Military Relief Societies—and they exempt certain products like small, short-term loans subject to Federal usury limits, to make sure service members still have a range of choices when they borrow.

·         The Consumer Financial Protection Bureau will work with other Federal regulators to ensure that financial institutions follow the new rules. Dodd-Frank provides CFPB with supervision and enforcement authority over banks and credit unions with over $10 billion in assets and some non-banks, including all payday lenders. If lenders violate the MLA, the loans will be void. The lender may also be subject to civil and criminal penalties.

·         The final rule reflects input from many stakeholders. In developing this rule, the Department consulted with the Federal Trade Commission, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the CFPB, the National Credit Union Administration, and the Treasury Department. The Department of Defense also received extensive public comment both before and after proposing these rules. The final rule benefits from this consultation and takes a balanced approach, which expands protections, preserves access to credit, and allows for effective industry compliance.

Five Years In, Dodd-Frank is Working

These rules continue the major progress President Obama has made to protect Americans as they borrow, save, and invest.  Consumer protections are stronger, our financial system is safer and more transparent, taxpayers are protected from risk, and regulators have more effective tools to do their jobs.

Here are some of the ways Dodd-Frank is delivering after its first five years:

·         Stronger Consumer Protections. The President created the Consumer Financial Protection Bureau (CFPB) when he signed Dodd-Frank into law. Since beginning operations in 2011, the Bureau—the first ever regulator dedicated solely to protecting financial consumers—has had a transformative impact, creating and enforcing clear rules of the road for banks and nonbanks involved in a wide range of financial markets, including:

o   Simpler, Safer Mortgages. The CFPB has put in place rules requiring mortgage lenders to assess borrowers’ ability to repay a potential loan, offer borrowers simpler disclosures, and follow national standards for servicing mortgages.

o   Stronger Protections in Other Consumer Lending. The CFPB is developing new protections for other consumer loans, overdraft services, and debt collection activities.  These financial activities have a profound impact on the day-to-day lives of many Americans—and the Bureau is making sure those Americans are protected.

o   Greater Transparency. The CFPB’s “Know Before You Owe” initiatives are improving Americans’ ability to safely acquire financial products and services. Through these initiatives, the CFPB has developed clear and easy-to-understand disclosures and agreements for credit cards, mortgages, and student loans, so consumers are better-informed about the costs and terms of these products.

o   Tougher Enforcement to Prevent Abuse and Deliver Relief to Consumers who have Been Harmed. The CFPB is working to make sure companies follow the new rules of the road. The Bureau‘s enforcement activities have delivered more than $10.1 billion in relief to more than 17 million consumers who were harmed by illegal practices. The CFPB has also protected military service members from deceptive mortgage advertising, predatory lending schemes, and hidden fees for automatic bill-pay services.

o   A Process for Receiving and Addressing Consumer Complaints. Building on these efforts, the CFPB has set up innovative programs such as their Office of Consumer Response to collect and address concerns raised directly by the public. In just a few years they have received and processed over 650,000 complaints.

·         Major Improvements in Financial Stability. Five years later, the President’s reforms have made the American financial system stronger and safer than it was before the crisis, including by:

o    Promoting Greater Resiliency. Before the crisis, the largest and most complex financial companies took excessive risks without enough capital, liquidity, or supervision. Wall Street Reform required “enhanced prudential standards” to be instituted for large financial firms while also providing flexibility for regulators to tailor these rules based on firms’ business models, riskiness, and size. Since then, banks have added $600 billion in additional capital, reduced their reliance on leverage and risky forms of funding, and dramatically increased their holdings of liquid assets. Today, American households can borrow and save in a safer, more stable financial system.

o   Curbing Excessive Risk-Taking. The Volcker Rule prohibits banks from engaging in speculative short-term trading and imposes tough restrictions on investing in private equity and hedge funds. The final rule promotes financial stability and preserves the depth and liquidity of U.S. capital markets, by allowing firms to continue their market-making, underwriting, and risk-mitigating activities.

o   Ending “Too Big To Fail”. Wall Street Reform ends “Too Big To Fail” as a matter of law by expressly prohibiting future taxpayer bailouts. Regulators now also have the tools to wind down large financial companies without putting the rest of the financial system at risk.  New rules help make large financial companies simpler to unwind, by requiring “living wills” that provide a roadmap for resolving the institution. These reforms force firms to bear the costs of their own risk-taking, instead of the taxpayer.

o   Fostering Regulatory Coordination and Financial Stability. Wall Street Reform created the Financial Stability Oversight Council to combat hidden risks in the financial system and coordinate oversight and regulation. The Council has designated eight financial market utilities and four nonbank financial companies for additional oversight, convened more than 50 times, and published five annual reports that highlight potential threats and make actionable recommendations.

·         Greater Transparency. Wall Street Reform re-aligned incentives in derivatives and securitization markets, hedge fund reporting requirements, and executive compensation as well as the creation of the Office of Financial Research. The reforms put in place since 2010 have increased transparency through:

o   ​Derivatives Reform. Wall Street Reform is bringing oversight and transparency to the over-the-counter (OTC) derivatives markets—shedding light on complex derivatives transactions and reducing the complex web of interconnections between firms that existed before the financial crisis.  Standardized derivatives are now required to be centrally cleared and traded on exchanges or transparent trading platforms, with appropriate margining. All swaps, whether cleared or uncleared, also must be reported to trade repositories, improving the ability of regulators and market participants to monitor and understand the risks in these markets.

o   Securitization Reform. Dodd-Frank has strengthened the securitization process, to better protect investors and minimize the threats to financial stability. The law prompted new rules for oversight, disclosure, and due diligence related to asset-backed securities.  It also required securitization sponsors to keep more “skin in the game,” better aligning incentives to encourage responsible lending.  

o   Hedge Fund Registration. Hedge funds and other private funds are now subject to registration, recordkeeping, and disclosure obligations. 

o   Executive Compensation. Wall Street Reform helps align business decisions and compensation with the interests of shareholders—increasing disclosure of executive compensation for publicly traded firms, giving shareholders an advisory “say on pay” for senior executives, and requiring that the board compensation committees be independent. 

Fighting for Stronger Protections Against Opposition from Republicans in Congress

Today’s commonsense protections for active-duty service members and their families had to overcome attempts by special interests and their Republican allies to block the new rules from going into effect.  Unfortunately, those efforts are nothing new.

Republicans in Congress have repeatedly tried to repeal Dodd-Frank entirely and waged attacks on nearly every part of the law, including critical protections for consumers and taxpayers. As the President said in his State of the Union and has reemphasized since, “we can’t put the security of families at risk by . . . unraveling the new rules on Wall Street”—and any effort to do so will earn his veto.