A new report from the Urban Institute examining the 2015 expansion of the Military Lending Act (“MLA”) concludes that it did not lead to better credit and debt outcomes for servicemembers and may instead have limited access to credit for some servicemembers with deep prime credit scores. The report, titled “The Effects of APR Caps and Consumer Protections on Revolving Loans: Evidence from the 2015 Military Lending Act Expansion,” used credit bureau data to assess the impact of the MLA’s expansion on credit card ownership rates, credit limits, delinquency rates, and credit scores of MLA covered borrowers with subprime credit scores. The report’s authors conclude that expansion of the 36% APR cap on revolving credit products more broadly to all consumers would be unlikely to improve credit and debt outcomes for the majority of borrowers.
The MLA and its implementing regulations contain protections for servicemembers and their dependents (referred to as “covered borrowers”) at origination of certain credit transactions. These protections include a maximum Military Annual Percentage Rate (referred to as the “MAPR”), a prohibition against requiring arbitration, and mandatory loan disclosures. 10 U.S.C. § 987(b), (c), (e)(3); 32 C.F.R. §§ 232.4(b), 232.6, 232.8(c). In 2015, the Department of Defense dramatically expanded the scope of the MLA when it issued a Final Rule that expanded the Act’s previously narrow definition of “consumer credit” beyond payday loans and other short-term credit products to a host of additional products, including credit cards and installment loans.
Using data from the Urban Institute’s longitudinal credit bureau dataset from August 2013 to August 2021 (a random 2 percent sample of all consumers from a major credit bureau) and then using zip code data to identify communities where more than 50 percent of the employed population are active duty servicemembers (defined as “military communities”), the researchers isolated and tracked consumers with subprime credit scores (Vantage scores of 600 or lower) from 2013 through 2021 to see how their credit and debt outcomes evolved before and after MLA coverage was expanded in late 2015.
The researchers found:
- No effect on the likelihood of having a credit card: Before the MLA expanded, military community members with subprime credit scores were just as likely as their counterparts in non-military communities to have a credit card. Forty-four percent of military community members had a credit card in 2015, compared with 45 percent of people in non-military communities. By 2021, 68 percent of military community members with subprime credit scores had a credit card, compared with 65 percent of similar consumers in non-military communities, a difference that is not statistically significant.
- No effect on average credit card limits among borrowers with subprime credit scores: Before 2016, military community members with subprime credit scores had similar credit limits as those in non-military communities ($2,566 and $2,636 in 2015, respectively). In the following years, consumers in both groups experienced an increase in their credit card limits. In 2021, the average credit card limit for cardholders with subprime credit scores in military communities was $7,769, compared with $7,961 for cardholders in the comparison group. The gap did not statistically change after the MLA expansion, suggesting that the policy did not have an effect on credit limits of military community members with subprime credit scores.
- No effect on revolving loan delinquencies: In 2015, revolving loan holders with subprime credit scores in military communities were slightly less likely to have a delinquency on their credit records than their counterparts in non-military communities (29 percent versus 30 percent, respectively). In 2021, this trend reversed: loan holders in military communities were slightly more likely to have a delinquency on their credit records than those in non-military communities (11 percent versus 10 percent, respectively). The researchers conclude that the lack of statistical difference in trends between the two groups suggests that the 2015 MLA expansion did not affect delinquency rates on revolving loans among military community members with subprime credit scores.
- No effect on the likelihood of being sent to collections: The researchers did not find evidence that the MLA expansion decreased the likelihood of collections for military community members with subprime credit scores. The share of borrowers with debt in collections went from 78 percent versus 79 percent for non-military community members in 2015 to 64 percent versus 60 percent in 2021.
- No effect on credit scores of borrowers with subprime credit scores: In August 2015, the average credit score among military community members with subprime credit scores was 539, compared with 537 among non-military community members. After 2015, credit scores improved among both groups (to 599 for military community members and 607 for non-military community members), likely caused by borrowers’ greater experience with and exposure to credit products, associated with age.
- Lost access to credit for deep subprime borrowers: Beyond the limited impact identified by the researchers among subprime consumers, they found that military community members with deep subprime credit scores (Vantage score of 500 or below) were 7 percentage points less likely than those in non-military communities to have a credit card after the MLA expansion. These consumers also had a credit card limit that was $1,422 less than those in non-military communities. The researchers did not find any evidence that the MLA expansion had an impact on the delinquency rates or credit scores of consumers with deep subprime credit scores.
The researchers conclude that broader expansion of the 36% APR cap beyond the MLA would be unlikely to improve credit outcomes for most borrowers and may limit access to credit to the most vulnerable consumers. The report acknowledges caps implemented on various forms of credit by numerous states, and recommends additional research to better understand how and when price caps may be effective and the impact on distinct subgroups of consumers, including deep subprime consumers. We recently discussed a new study examining the effects of Illinois’ 36% interest rate cap under the Illinois Predatory Loan Prevention Act, which concluded the rate cap significantly reduced access to small-dollar credit. (A discussion of that study between Ballard Spahr’s Alan Kaplinsky and one of that study’s authors, Mississippi State University Professor Tom Miller, is available here.)
Ultimately, the researchers–Thea Garon, Breno Braga, Ashlin Oglesby-Neal, and Nick Martire–point to the need for regulators and financial service providers to gain “a better understanding of the factors that drive successful loan performance, more insight into effective business models, and further insight into emerging technologies that can support innovative lending products and practices.”