A proposed regulation from the Department of Defense that wouldbroaden the types of loans covered by the Military Lending Act could affect credit union lending.

Under fire in the proposal were payday alternative loans ascurrently allowed by the NCUA, some of which would be off limits tomilitary service members and their families. Some credit cardprograms and overdraft protection loans would also fall afoul ofthe new rules.

“Before finalizing NCUA's payday lending alternative rule, wespecifically considered how NCUA's rule would fit with existingDefense Department regulations and determined that they were insync.” NCUA Board Chairman Debbie Matz said in a statement. “However, the DefenseDepartment's new proposed rule would broaden the definition of'consumer credit' under Military Lending Act regulations in a waythat would prevent federal credit unions from making paydayalternative loans permitted by our rule.”

Current NCUA regulations allow federal credit unions to offerpayday alternative loans with an interest rate of up to 28% and anapplication fee of up to $20. Under the MLA, consumer credit tocovered borrowers is subject to a 36% cap on the military APR,which includes application fees. If these regulations are revisedto cover payday alternative loans, the NCUA said, the rate and feefor many payday alternative loans would be higher than the militaryAPR cap.

About 500 federal credit unions offer payday alternative loans,the NCUA said. They hold about $23 million in outstanding loans,with an average loan balance of $382. The NCUA added that some ofthese payday alternatives include a savings component and access tofinancial literacy programs.

The proposed rule would also add credit cards and overdraftlines of credit. As with payday alternative loans, the combinedinterest rates and fees for these products could exceed the 36%military APR cap, even if the interest rate is below the general18% interest rate cap for federal credit unions, the NCUA said.

The proposed rule did, however, exempt residential mortgageloans and most auto loans.

The proposal would update regulations the DOD put into place in2007 to implement the MLA. The MLA capped the annual interest ratelenders can charge members of the military to no more than 36%.However, in its regulations, DOD defined those products veryspecifically, to include only closed-end payday loans for no morethan $2,000 and with a term of no more than 91 days, closed-endauto title loans with a term of 181 days or fewer, and closed-endtax refund anticipation loans.

In response, some lenders changed their products so that theyfell outside of these narrow definitions, the DOD said.Additionally, the DOD said other products that had not beenpreviously covered had come to its attention.

“NAFCU strongly supports consumer protections and notes thatcredit unions are already subject to a cap on finance charges,”Hunt said. “We want to ensure that there are no unintendedconsequences from this rulemaking that would prevent credit unions,particularly those operating on military installations, fromproviding the safe consumer friendly products the men and women ofthe Armed Services have come to depend on.”

Read more: CFPB's Cordray, Sen. Udall praiseproposal …

CFPB Director Richard Cordray praised theproposal in a release.

“As one of the agencies charged with enforcing the MilitaryLending Act, we have seen firsthand how lenders use loopholes inthe rule to prey on members of the military. They lurk rightoutside of military bases, offering loans that fall just beyond theparameters of the current rule,” he said.

“This proposal would shut down the predatory lending to themilitary that has flourished through exploiting legaltechnicalities. By broadening the types of credit covered under thelaw, this proposal would carry out the will of Congress by enablingthe CFPB to stop lenders from harming service members in ways thelaw was intended to stop.

Sen. Mark Udall (D-Colo.), who serves on the U.S. Senate ArmedServices Committee and has sponsored bills that would raise themember business lending cap, also lauded the proposal in arelease.

Udall said he and several of his colleagues urged U.S. Secretaryof Defense Chuck Hagel to take these aggressive steps to safeguardservice members.

“Many of our men and women in uniform have been victimized bypredatory lenders who charge outrageous interest rates, puttingtroops at risk. That's why I have led the fight to get the Pentagonto overhaul regulations implementing the Military Lending Act andensure service members and their families are not victimized byscammers and unscrupulous lenders,” Udall said. “I am proud theU.S. Department of Defense responded to my call and took thesecommon-sense steps. I will keep fighting, though, to ensure thePentagon and Consumer Financial Protection Bureau continue to workto protect our service members from predatory lending schemes.”

Udall's office has not yet returned a call seeking comment onthe proposal's effect on credit union lending.