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Payday Loans

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Updated October 28, 2006

One of the provisions of the FY 2007 Military Authorization Act, makes it illegal for creditors to grant payday loans and car title loans to military members.

The change also prohibits charging more than 36 percent interest to military borrowers. Fees, service charges, renewal charges, credit insurance premiums or any other product sold with the loan must be included when calculating the interest rate. In the past, there have been "horror stories" of military members paying up to 800 percent interest by using such gimmicks.

The new law is a result of Department of Defense recommendations made in a report to Congress last August.

The law will effectively close down payday loan operations around military bases. Such operations can currently be seen outside the gates of almost every U.S. Military installation in the states. Under the new law, lenders will not be allowed to lend money to military members or their families using a check, or any other means of access to a financial account, as security for the loan.

The new law will take affect when the Department of Defense writes implementation instructions, or on October 1, 2007, whichever comes first. The law is not retroactive, which means loans that are made before it goes into affect are not covered. Lenders who violate the provisions of the law are subject to a fine and up to one year in prison.

The new law prohibits:

    Requiring military members to set up an allotment as a condition of receiving a loan.

    Requiring the use of a vehicle title as security for any loans made to service members and military family members.

    Using a check or any other access to a member's financial account as security for a loan.

    Lenders from renewing, repaying, refinancing, rolling over, or consolidating consumer credit using the proceeds of other credit granted by the same lender to the military member.

    Requiring military members to waive their rights under the Servicemembers' Civil Relief Act (SCRA), or any other federal law.

    Denying the opportunity for military members to pay the loan off early, and any penalties for early payments.

    Any unreasonable clauses in the contract designed to make it difficult for military members to take a creditor to court.

    States from allowing creditors to violate state consumer loan protection laws for military members who are nonresidents.

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