In 2007, Congress passed the Military Lending Act in response to stories of service members sinking under debt or losing their homes because payday lenders or unscrupulous life insurance providers targeted them.
While this law capped the acceptable interest rate for payday loans offered to service members at 36 percent, it only covered loans of up to $2,000 that lasted for 91 days or less and car loans of 181 or fewer days. Many financial predators didn’t bat an eye and found ways to get around the changes — increasing the loans they offered to $2,001, extending them for a period beyond 181 days, or keeping them open-ended, without a set date for repayment. Another trick was to offer an interest rate under 36 percent for the first 91 days, only to increase the rate (sometimes by quadrupling it or raising it even higher!) on day 92.
Richard Cordray, the director of the Consumer Financial Protection Bureau, tells the New York Times, “We have seen firsthand how lenders use loopholes in the rule to prey on members of the military. They lurk right outside of military bases, offering loans that fall just beyond the parameters of the current rule.”
According to a Wall Street Journal survey, 39 percent of active-duty service members report being short on cash between paychecks, 16 percent are over their credit limit on credit cards, and 10 percent find themselves unable to pay their monthly bills.
Ed Olander, a personal financial maager at Naval Base San Diego’s Fleet and Family Support Center tells Alan Zibel and Ben Kesling of the Wall Street Journal that the lenders are “really like Whac-A-Mole, you hit them in one area and they pop up in another.”
Fortunately, the Defense Department recently announced a plan that would expand the types of loans covered by the existing legislation beyond payday lending to include credit cards, retail payment plans and other financial products. The new plan will also eliminate the time-period limitations, making it more difficult for lenders to play around with repayment schedules. Finally, it will not allow lenders to force borrowers to agree to settle disputes through arbitration — making it possible for military members to sue lenders for predatory practices.
Indebtedness of military members and their families is a vexing problem. Not only is it sad for those that have served their country to be saddled with so much financial hardship, but the stress it causes can contribute to homelessness among veterans. Additionally, soldiers in debt can be labeled a security risk, leading to their security clearances being stripped and leaving them unable to perform their jobs.
The payday loan industry, and legislators who accept campaign money from these businesses, of course, oppose the proposed changes, but those behind them hope to have the new rules in place by 2015.