36% APR Cap on Loans to Service Members and Their Dependents


Congress has passed and sent to the President for signature the John Warner National Defense Authorization Act for Fiscal Year 2007, H.R. 5122. This Act contains a usury rate limitation for loans to service members and their dependents of 36% and other important substantive limitations. The effective date of the Act is October 1, 2007, although there is a method for it to become effective earlier. The Act, as finally adopted, applies to many types of loan transactions, whether made by a bank, finance company, pawn shop or deferred presentment licensee. The Act does not apply to real estate mortgages and purchase money installment sales contracts.


The Secretary of Defense is given rulemaking authority. He is to consult with the Federal Trade Commission and the federal banking agencies in connection with such rulemaking. The rulemaking will give us guidance as to the terms “creditor”, “consumer credit”, and “interest”. While these terms are commonly understood in consumer credit transactions, their definitions may well be expanded for the purposes of the Act. What is quite clear is that a “covered member” does include active duty members of the armed forces, including anyone on active National Guard duty and Reserve duty, including their dependents. What is also clear is that the term “interest” has been expanded to include all fees, service charges, credit insurance premiums and the cost of any ancillary products sold with any subject extension of credit. Thus, a review of the federal Truth-in-Lending Act (“TILA”) statement of the Annual Percentage Rate (“APR”) is not enough to determine whether the transaction is subject to this new federal usury limit.


Most significantly, state and federal laws that would otherwise exempt the transaction from usury laws are, themselves, preempted by this new statute. Arbitration is prohibited in connection with these transactions as are “onerous legal notice provisions” to initiate dispute resolution. Most tellingly, contracts that violate the provisions of this Act are deemed to be void.

This Act is a consumer plaintiff lawyer’s dream Not only does it open the question of what constitutes a 36% “interest rate”, it also opens the question of whether disclosures have been provided “in writing” in connection with electronic transactions. The Act does not answer the question of whether a creditor has a duty to inquire if an applicant is a “covered member” or a “dependent”.


There are new mandatory loan disclosures with respect to extensions of consumer credit to service members and their dependents. These include a statement of the APR applicable to the extension of credit (perhaps something different than APR required for TILA) and a clear description of the payment obligations of the service member or the service member’s dependent (perhaps something different than required by TILA). Violation of the law is a misdemeanor which actually calls for imprisonment for not more than one year and potential consequential and punitive damages.


Most significantly, the Act makes it unlawful for any creditor to extend consumer credit to a covered member or a dependent of such member with respect to which “the creditor uses a check or other method of access to a deposit, savings or other financial account maintained by the borrower, or the title of a vehicle as security for the obligation;….” This provision apparently outlaws entirely the taking of a vehicle title as collateral and the taking of a check in connection with non-purchase money extension of credit to a covered member or a dependent.

We will be closely following developments in connection with H. R. 5122.


Maurice L. Shevin, Attorney at Law
Sirote & Permutt, P.C.
2311 Highland Avenue South (P. O. Box 55727)
Birmingham, AL 35205 (35255-5727)
Phone: 205/930-5149; Fax: 205/212-3810
Email: mshevin@sirote.com