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.
Tag: Payday Lenders
This Camouflaged Credit Union Saves Immigrants From Predatory Loans
If you see a neon sign on a storefront reading “cambio de cheques” (check cashing), you probably think it’s just like any other check-cashing and payday loan purveyor out there.
But while the Community Trust Prospera in East San Jose, California, is situated in a strip mall next to a beauty shop (like many other check-cashing joints), it’s anything but your typical check-to-cash operation.
The Community Trust Prospera is actually a credit union, offering its patrons (many of which are Latino) much more than just quick access to greenbacks. It provides patrons the opportunity to build their credit.
Many immigrants conduct their lives on a cash-only basis, steering clear of intimidating banks. Last year, the National Council of La Raza estimated that 20 percent of Latinos in America don’t use banks, a higher rate of bank avoidance than what is found among any other group.
In response, Self-Help Federal Credit Union has opened six branches including Community Trust Prospera in San Jose and Los Angeles to try to reach some of these underserved communities. These branches now boast 11,000 members, who have socked away a whopping $1.3 million in savings.
Community Trust Prospera offers many of the same services that check-cashing and payday loan establishments do, but without the oft-typical predatory interest rates and fees. Alexia Fernández Campbell of National Journal spoke to Darwin Morán, who uses the financial institution to wire money to his family in El Salvador and to cash checks from his landscaping work. Initially, he resisted opening a bank account, but the staff there finally convinced him to.
“I started to become friends with them and slowly I started to change my mind,” Morán told Fernández Campbell. “Fixing my credit and paying my debts was so important to me,” he said.
Improved credit and a bank account gives low-income people a greater ability to rent an apartment. And taking advantage of programs such as Community Trust Prospera’s Fresh Start Loan (which is a type of loan that requires a deposit), eliminates the need to visit payday lenders — yet another important step towards establishing a more secure financial future.
MORE: Here’s A Smart Solution That Stops Immigrants From Being Robbery Victims