One way to honor our military personnel on Veterans Day is to declare them prohibited from abusive lending. This was the idea behind the 2007 Military Loans Act, which, among other important things, set a 36% limit on interest and fees for consumer loans to the military and their dependents.
However, it fell to Defense Ministry officials to work out the details, and under pressure from the lending industry, the DOD agreed to a set of rules that left a lot of room for evasion. The result? Abusive lenders continued to target military families with loans at interest rates of 300 percent and above.
Now the DOD is preparing to update its rules in order to truly fulfill the mandate of the law. This time around, the rules he proposed are tough enough that the 36% rate cap is maintained. But lawmakers – and the military and consumer rights activists who led the fight for this crackdown – are preparing for another intense campaign of resistance from a politically and economically powerful industry.
For salary, car title, and other abusive and costly lenders who congregate around military bases across the country, the military make very attractive clients. Many are young and inexperienced financially, and their jobs often require them to move quickly, which can put a spouse out of work or temporarily burden a family with mortgage or rent bills in two places at once. Yet, service members also tend to be easy to collect. Most have regular paychecks and bank accounts, from which lenders can withdraw money by direct debit; many also have additional motivation to repay, as indebtedness can adversely affect a soldier’s security clearance and career prospects.
The Military Loan Act was the result of widespread concern, confirmed by DOD research, about the impact of high-cost debt not only on the financial well-being of the military, but on the impact of high-cost debt. morale and military readinessThe rule of origin, however, defined the loans to which the rate cap applied in a narrow and specific manner that encouraged evasion. These rules covered payday loans under $ 2,000 with loan terms of 91 days or less, auto title loans with terms of up to 181 days, and early tax refund loans. Everything else was exempt.
The industry responded by favoring larger, longer-term loans. In a 2011 case this illustrates what the lenders have continued to get away with, a south carolina-based Marine sergeant with 18 years of service took out a car title loan to help cover debts associated with a divorce. His loan of $ 1,615, secured with the title of his Ford Expedition, provided for 32 monthly payments totaling more than 10 times the amount he had borrowed. His APR on the contract came to over 400 percent.
The proposed new rules, in addition to capping all loans at 36%, prohibit lenders from using post-dated checks or direct debits as collection tools. They also prohibit the use of forced arbitration clauses in military loans. This is crucial. While arbitration may seem like a simpler and friendlier alternative to litigation, it is not. In practice, that means putting your legal fate in the hands of a private company that has been paid and hired – and hopes to be hired again – by the lender. To make matters worse, most arbitration clauses include class action bans, so no matter how many service members have been affected by the same unfair practice, the lender must deal with each case separately. Borrowers may even find it difficult to collect evidence of systematic misconduct, as the disclosure requirements of arbitration proceedings are much lower than those of court proceedings.
Expensive lenders will likely use considerable resources, including their elected friends, to try to weaken the rules again. Consumer and veterans organizations applauded the new rules; they may have to work hard to keep them intact. (As part of this effort, we launched a petition urging DOD to stand firm.)
The proposals of the Ministry of Defense are obviously important in themselves. Our men and women in uniform have a lot on their minds. In the service of their country, they willingly go on long deployments, leaving behind their friends and family. Lenders should not be allowed to take advantage of it; loans with triple-digit interest rates and onerous repayment terms shouldn’t weigh on them.
But the story of the Military Lending Act also holds an important lesson for those engaged in the larger effort to curb the bad actors in the consumer lending world – bad actors who have repeatedly demonstrated their ability. to evade state and federal laws. This fight will come to a head in the coming months as the Consumer Financial Protection Bureau gets down to writing rules for consumer loans (including payday loans, car titles and other high-cost loans. and quick repair) to Americans both in and in civilian clothes.
Payday lenders prey on the economically desperate. Their business model, as the office has clearly documented, is to drag people into an unmanageable cycle of long-term high-cost debt. Seventy-five percent of payday loan fees come from borrowers who took out 10 or more loans in a single year. In his recent action against Cash America – one of the largest payday lenders – the bureau found that the company, in addition to using illegal and harassing debt collection tactics, had explicitly trained its employees to pressure borrowers to take out expensive new loans to pay off their old, expensive loans.
As the development of broader rules is underway, more than 460 groups – representing all states in the nation – have appealed to the Consumer Financial Protection Bureau to make the most of a “one-stop-shop” for meaningful reform. This will result in rules that:
· Require prior verification of borrowers’ repayment capacity;
· Strongly limit repeat loans;
· Set a ceiling on total indebtedness; and
· Prevent lenders from requiring post-dated checks or electronic access to a bank account as a condition for granting credit.
Settling for something less would invite an escape like the one that undermined the Defense Ministry’s first attempt to implement the Military Loans Act. But if the office takes this experience to heart, it has a chance to rid the market of loans that are built to worsen rather than solve people’s financial problems. It would be a great achievement.