Small-Dollar Loans to Servicemembers, the Electronics Version (or an...

Yesterday the Consumer Financial Protection Bureau, along with 13 state attorneys general (including from my new home state of Indiana), announced a $92 million settlement and issued an enforcement action against Colfax Capital Corporation and Culver Capital, LLC, known as Rome Finance, for targeting military families (and other consumers) with predatory loans to buy electronics, such as computers and televisions.

Rome Finance would offer credit to consumers for the purchase of such electronics primarily at mall kiosks near military bases, promising instant financing and no money down. Rome Finance then jacked up the price of the electronics, thereby masking true finance charges and APRs, withheld information on bills about balances and payments, and violated various states' laws in collecting the debts. In some instances, service members would receive statements indicating that the APR on their loan was 16% when the APR really was over 100%. The scheme is a reminder of the endless variations that companies peddling alternative financing / high-cost credit may use, and how broad laws against predatory lending need to be in order to be effective.

The Military Lending Act (MLA) currently provides that active servicemembers may not be charged an interest rate higher than 36% on certain types of closed-end consumer loans, such as payday loans and auto title loans. The MLA already has been criticized for its loopholes that exempt longer-term loans and, specific to Rome Finance's scheme, open-end credit. In 2012, Congress ordered the Department of Defense to examine the effectiveness of the Military Lending Act in light of these loopholes. The DoD has indicated that it will propose a rule to address the loopholes sometime this year.

Beyond demonstrating the breadth of the MLA's loopholes and the need for additional regulations, Rome Finance's scheme has obvious lessons beyond high-cost lending targeted at military families. Ordinary consumers can just as easily get caught by jacked up prices on goods, purposefully unclear bills, and other tricks. As of now, there are fewer protections like the MLA (whatever its faults) in place to protect all consumers. The result is that each state has its own rules, some with less loopholes than others. Indeed, in this case, portions of the CFPB's enforcement action rely on state usury caps and laws about collecting illegal consumer debts. As I've mentioned before in connection with payday loans, I think national regulations like the MLA (but more comprehensive) must be the future of alternative financing regulation if predatory lenders are to be effectively deterred.