WASHINGTON, DC - In an effort to protect soldiers and their families from abusive financial practices, U.S. Senator Jack Reed (D-RI) introduced an amendment to the 2012 Defense Authorization bill that would prevent lenders from charging excessive fees to military families.

Following a 2006 Pentagon report which found 17 percent of service members used payday loans and that “predatory lending undermines military readiness, harms the morale of troops and their families, and adds to the cost of fielding an all-volunteer fighting force,” Congress passed the Military Lending Act (MLA) to limit interest rates at 36 percent for certain payday, auto title, and refund anticipation loans made to soldiers and their families.  But since the MLA was passed, some banks have circumvented the law by offering troops payday loan-style products with interest exceeding well beyond the 36 percent annual limits set for members of the military.

Reed’s amendment will close several loopholes by ensuring banks can’t simply slap new labels on the same exorbitantly high-interest payday loans that the MLA was designed to prohibit.

“We need to stop unscrupulous lenders from targeting our soldiers, saddling them with enormous debt, and undermining our national security.  This amendment enhances the Military Lending Act by closing loopholes that allow lenders to charge exorbitant fees to our service members,” said Reed, a former Army Ranger and senior member of the Armed Services and Banking committees.  “We need to crack down on abusive lenders and aggressively go after banks that violate the Military Lending Act.”

The Reed amendment would close three loopholes in the law:

First, it would make it clear that the law applies to “open-end” credit as well as “closed-end” credit.

The MLA currently protects service members from predatory payday and car title loans, but only those that are structured as “closed-end” credit products.  Perhaps not surprisingly, many lenders are now structuring loans as “open-end” revolving credit lines to evade the law. 

Secondly, the amendment will help end the practice of charging high-cost overdraft fees, averaging $34, for every single individual debit card transaction that the financial institution approves, despite the customer’s lack of sufficient funds.  The average size of the debit card transaction that triggers a $34 fee is only $17 – meaning the fee is more than double the amount of credit extended.  And there is little risk the credit will not be repaid because the financial institution repays itself first upon the customer’s next deposit.

Retired Navy Admiral Steve Abbot, president of the Navy-Marine Corps Relief Society, testified at a Banking Committee hearing that overdraft fees are the top problem he sees in his work with the Relief Society.  He stated that: “Banks and credit unions on and near military bases continue to charge exorbitant and multiple fees associated with overdraft protection."

The financial institution can easily decline the transaction at the point-of-sale if the customer lacks sufficient funds.  This results in no fees to the customer, from either the financial institution or the merchant.  Alternatively, the institution can offer reasonably priced overdraft lines of credit or other forms of overdraft protection, to cover debit card purchases that overdraw the account.

Finally, Reed’s amendment ends the manipulative practice of reordering customers’ transactions from largest to smallest in order to maximize overdraft fees.

The FDIC recently advised the financial institutions it supervises not to post transactions in order from highest to lowest.   But this guidance does not apply to financial institutions supervised by other federal regulators. 

Last year, a federal District Court found that the “bookkeeping device” of posting transactions in order from highest in amount to lowest can “turn what would ordinarily be one overdraft into as many as ten overdrafts, thereby dramatically multiplying the number of fees the bank can extract from a single mistake.”  At a typical $34 per fee, nine additional overdrafts would equate to $306 in additional overdraft fees in a single day.

Senator Reed led the bipartisan fight to create a new Office of Service Member Affairs within the Consumer Financial Protection Bureau (CFPB) to serve as a watchdog for military personnel.  This Office educates and empowers service members and their families to make better informed decisions regarding consumer financial products and services.  It has the tools and the mandate to take on abusive lenders, but until the CFPB gets a director – who Republicans have vowed to oppose, no matter how qualified they are -- it does not have the authority to supervise and enforce consumer protection laws.

Former Ohio Attorney General Richard Cordray was nominated in July to lead the CFPB.

“We have a responsibility to protect our troops from abusive financial practices.  The CFPB has the mission to protect our troops, but not the ammunition.  I urge my colleagues to put partisanship aside and do what is best for those who risk their lives every day defending our nation.  We must pass this amendment so our troops can focus on the difficult task of protecting our country without the burden and stress of insurmountable debt,” said Reed.

The 2012 Defense Authorization bill is currently being debated by the full Senate and Reed’s amendment is expected to be considered later in the week.