Department of Defense Expands Ban on Forced Arbitration for Servicemembers

by Ellen Taverna

Today the Department of Defense (DoD) issued a new proposed rule expanding important protections to servicemembers and their families from predatory lending. The new rule closes the loopholes in the Military Lending Act (MLA) that allowed many financial services to fall outside the scope and protections of the law and put servicemembers at financial risk.

In 2006, the DoD reported to Congress that “…predatory lending undermines military readiness, harms the morale of troops and their families, and adds to the cost of fielding an all-volunteer fighting force.” In response in large part to the DoD report, the MLA, bipartisan legislation passed by Congress and signed by George W. Bush in 2007, capped interest rates at 36 percent and applied other key consumer protections to certain forms of credit.

One very important consumer protection of the MLA includes a ban on forced arbitration clauses. Forced arbitration clauses are buried in the fine print of financial contracts and require servicemembers to resolve disputes with companies in a private system, outside of court. Arbitrators are not required to follow the law, and there is no public review to make sure the arbitrator got it right. In its 2006 report, the DoD states that “Servicemembers should retain full legal recourse again unscrupulous lenders. Loan contracts to Service members should not include mandatory arbitration clauses or onerous notice provisions, and should not require the Service member to waive his or her right of recourse, such as the right to participate in a plaintiff class.”

Unfortunately, the MLA only covers a narrow subset of payday loans, auto title loans and refund anticipation loans and unscrupulous business often founds ways around the law. We applaud the DoD’s new proposed rule to expand the current military financial protections and the ban on forced arbitration to a wide range of high-cost loans made to active-duty servicemembers and their dependents.

We hope the Consumer Financial Protection Bureau (CFPB) follows the lead of the DoD to protect all consumers – both military and civilian.  The CFPB is required by the Dodd-Frank Act to study the use of forced arbitration and is authorized to issue a rule to limit or ban forced arbitration in all consumer contracts for financial services and products under its jurisdiction.  We encourage the CFPB to write a strong rule to eliminate forced arbitration clauses for the benefit of all consumers.