by: Alan Zibel

Two U.S. financial regulators have sharply different views of a Defense Department proposal to limit high-cost personal loans made to service members.

The National Credit Union Administration and Consumer Financial Protection Bureau both reacted Friday to the new Pentagon proposal that would allow more varieties of loans to be covered by a 36% cap on interest rates. The cap applies to active-duty service members and their families.

The  military proposal “would prevent federal credit unions from making payday alternative loans permitted by our rule,” said Debbie Matz, the chairman of the NCUA’s board. Those credit-union loans are intended to be a better deal for borrowers than payday loans from for-profit lenders.

CFPB Director Richard Cordray, meanwhile, applauded the proposal, saying it would “shut down the predatory lending to the military that has flourished through exploiting legal technicalities.”

The divergence of opinion highlights a key difference between the CFPB and other U.S. financial regulators. While the CFPB’s sole emphasis is the protection of consumers, other financial regulators such as NCUA also strive to maintain the profitability of the institutions they regulate.

The credit-union regulator in 2010 approved rules allowing credit unions to make loans of between $200 and $1,000 that last between one month and six months. Interest rates are capped at 28%, and the application fee can be no more than $20. About 500 credit unions currently offer the loans, with an average loan size of $382, the credit-union regulator says.

Officials at the NCUA say many of these “payday alternative” loans would exceed the military lending cap, because the application fee for the loans would boost the annualized interest rate to more than 36%.

A trade group for the credit-union industry was also skeptical about the military proposal.

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