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Lenders prey on U.S. service people, feds say

Lenders are exploiting legal loopholes and gouging United States military personnel with pricey financial products, according to a federal consumer watchdog.

The Consumer Financial Protection Bureau said in a report on Monday that laws restricting how much interest firms can charge for payday, auto title and other loans are too narrow. Under the Military Lending Act, lenders are barred from charging U.S. service people more than 36 percent interest for certain short-term loans. But financial firms are effectively skirting the rules by offering longer-term loans to U.S. service people and their families, allowing lenders to hit borrowers with higher rates and heavy fees.

In one example cited by the agency, a military member's spouse was given a 12-month title loan -- about double the length covered under the law -- and charged an annual percentage rate of 300 percent. That meant the cost to borrow $2,575 was $5,720.

"The current rules under the Military Lending Act are akin to sending a soldier into battle with a flak jacket but no helmet," CFPB director Richard Cordray said in a statement. "To give our troops full-cover protection, the rules need to be expanded."

The CFPB backs a U.S. Department of Defense plan to strengthen the Military Lending Act so that service members are better protected from expensive loans. The agency is joined by nearly 190 consumer, military and civil rights groups that also favor a move to tighten the law.

Protections for service people were put into place in 2006 because of the widespread practice of taking advantage of military personnel and their families. Lenders that profited from exorbitant interest rates targeted such borrowers by setting up around military bases.

The problems remain widespread. A CFPB study of 55,000 military members found that nearly one-quarter -- a bigger percentage than the civilian population -- took cash advances that cost them a lot in fees. Charges of about $10 per $100 in advances resulted in the payment of some $5 million on $50 million in advances in one year among those service members.

Credit lines with APRs in excess of 300 percent were not unusual for service members who had open-ended lines of credit. In one extreme case, an off-shore lender provided a service person with an open-ended line of credit with an APR of 584 percent.

Those onerous terms are legal because open-ended credit terms are not covered by the Military Lending Act. The proposals from the CFPB and Defense Department would extend the protections to loans of all maturities.

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