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Efforts to regulate military payday lending draw flack

The battle to protect members of the U.S. military from financial fraud continues on several fronts.

The most recent event was the recent release of a proposal from the Department of Defense that would limit the annual interest rate to 36 percent on so-called payday loans. While that seems high compared with other types of credit options, it is substantially below the rates that have been charged in the past, often ranging into triple digits.

Last year, Congress approved legislation to limit the interest rate on short-term lending programs target toward the military and other people who find themselves in need of funds. However, it assigned the responsibility of defining the scope of the law to the Department of Defense. It is now in a 60-day comment period that allows groups and individuals to present their opinions.

That has already generated some controversy.

"Our troops should not have to worry about whether they are working with the right lender, or whether they're going to be charged hidden fees," said Lauren Saunders, managing attorney with the National Consumer Law Center. "There's no excuse for charging military families outrageous interest on loans that they have taken just to get by. These protections must be meaningful and comprehensive."

Her comments were in response to a request to exempt banks and credit unions from some of the restrictions placed on companies in the payday loan business.

Banks were quick to respond to the criticism.

"This proposal represents a strong basis from which we can all work together to solve a complicated issue," said Wayne Abernathy, executive director of the American Bankers Association. "The Defense Department has preserved the consensus we share: that bad practices should be stopped without harming military families and financial companies that serve them.

"Many of the suggestions we offered to achieve these goals are echoed in the proposal, reflecting our concern that service men and women not lose access to mainstream financial products," Abernathy added.

However, The Military Coalition -- a group of advocates who support the plan to limit costs on loans -- asks that the interest rate limit also include all fees and apply to all lenders and institutions.

"Let's not undercut the intent of the law and end up protecting predatory lenders rather than military members and their families," said Col. Michael Hayden, deputy director of Governmental Affairs with the Military Officers Association of America. "The 36 percent cap on interest rates leaves plenty of room for banks and credit unions to do business responsibly. We should expect their full support for this protection."

Earlier this year, America's Community Bankers -- national trade group -- commented to the Department of Defense on the issue.

"We recommend that the department not include insured depository institutions within the scope of the regulations," said Patricia Milon, chief legal officer at America's Community Bankers. "This would have the effect of focusing the provision and implementing regulations on those parts of the financial services world that are unregulated and that are preying on the financial inexperience of young military personnel, while enabling banks to continue providing service members with an alternative to payday loans."

To their credit, the companies Milon criticized as "preying on the financial inexperience of young military personnel" have been aggressively attempting to clean up their act to stay in business.

"We have listened to concerns about our industry and have developed innovative solutions to address them," said Darrin Andersen, president of the Community Financial Services Association (CFSA).

The group has launched a $10 million consumer-education campaign and financial-literacy program. All advertising and market materials will feature the caution: "Payday advances should be used for short-term financial needs only, not as long-term financial solutions. Customers with credit difficulties should seek credit counseling."

In addition, the CFSA has changed its best practices policies to include offering loan customers the option of an extended payment plan if they find they cannot repay their loan when due. This option is provided to customers for any reason with no additional cost.

"These enhancements are part of an ongoing effort to respond to the concerns of policymakers and protect the financial well-being of our customers," Andersen said. "These new initiatives will ensure that CFSA members hold themselves to a higher standard of responsible service."

Here's hoping the Department of Defense can get all interested parties to agree on this important matter that, in its own way, is part of the defense of the country.

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