As he was approaching near certain defeat at the ballot box in 2006, then Senator Jim Talent succeeded in adding an amendment to the annual defense authorization bill to restrict private firms from providing credit to members of the armed services and their families. The Talent Amendment, labeled the Military Lending Act, made administration of the new mandate and the writing of implementing regulations the job of the Department of Defense. In this way, DoD became a financial regulator.
When the Dodd-Frank Act created the new Bureau of Consumer Financial Protection, it gave the Bureau responsibility for administering more than a dozen financial consumer statutes. The Military Lending Act was not one of them. Not to worry, the Bureau before long got around to convincing DoD to expand its regulations along lines thought up by Bureau lending experts. Bureau officers do not deny their inspirational role, and neither do folks at DoD. In fact, after promulgating its new and expansive regulations, DoD was gun-shy about explaining some of its murkier and confusing provisions, since they emanated from the minds of consumer Bureau ghost-writers. For example, the new rule prohibits service members and families from using their checking accounts to make payments on covered consumer loans. I could not explain that, either.
As the protectors at the Bureau saw it, the trouble was that the existing MLA regulations were not written to apply to banks. That was an intentional decision by DoD, whose leaders in 2007 did not see banks as the problem. The long record of military consumer experience with banks was solidly positive. Yet, as first proposed, the draft rules would have made it hard if not impossible for banks to lend to military families. Besides rendering service members second-class financial customers, its effective ban on bank lending would also have imposed a hardship on the spouses of soldiers and sailors, trying to run family businesses or otherwise manage finances, particularly while husband or wife was on deployment. DoD chose to leave bank loans out of the final regulations. The Bureau, however, after arriving on the scene in 2010, disagreed with DoD’s rules and later convinced DoD to promulgate new ones.
The new DoD regulation (which goes into effect on October 3) as expected would make it harder for banks to serve members of the military and their families. For example, just who is a member of a military family, and how would a banker know? Under the previous rules, a banker could ask a customer and take the customer’s word for it. Under the new rules, a banker has to assume that a potential customer is lying if he or she claims not to be in a military family. (If the financial protections for a military family are so much better, why would someone lie about not being military and thereby avoid the MLA’s protections? Maybe they force the customer to receive unwanted help, since the effect of the MLA is to reduce credit to covered customers.) The new rules as written make financial firms verify against DoD databases (not always up-to-date, on an IT system known to crash) whether a potential customer—any potential customer—belongs to a military family.
After some months, DoD officials are coming to realize that the new rules may do harm to military families where department intentions were to provide protection. Reluctant to change the regulation, however, to fix glaring problems or clarify ambiguous provisions, DoD has issued an “interpretive rule” offering notable corrective help. For example, the new interpretations would clarify how oral disclosures are provided, allow creditors to use a credit report to verify military family status, and would now give the O.K. to military borrowers to repay loans by using a check or debit transaction.
The DoD officials appear to be sincere in not wanting the new, expanded rules to make credit less available to military families. Coming October, we will see to what extent these Bureau-inspired protections nevertheless have the effect of reducing availability of financial services, as do most other Bureau regulations.