"I've lived on or near military bases my entire life and seen that strip outside the gates, offering everything from furniture to used cars to electronics to jewelry, and the high-cost credit to pay for them. [They line up there] like bears on a trout stream."
So says Holly Petraeus, head of the Office of Servicemember Affairs at the U.S. Consumer Financial Protection Bureau, or CFPB, (and also the wife of retired four-star Gen. David Petraeus). And she's not the only one concerned about the epidemic of payday lenders preying on our nation's military.
U.S. Sen. Jay Rockefeller calls the payday lenders who set up shop outside U.S. military bases "scoundrels" and "scumbags." Sen. Dick Durbin accuses them of "exploiting" military families.
Harsh words, you think? But consider the actions that have these folks so riled up.
A (short) history of payday loans and the military
In 2005, a study by the Center for Responsible Lending [link opens a PDF] found that one in five active duty military personnel had taken out at least one payday loan the previous year. The CFPB, says the number is now 22% -- and both these estimates exceed the Pentagon's own estimate of 9% of enlisted military personnel and 12% of non-commissioned officers availing themselves of payday loans.
Payday lenders routinely charge interest on these loans that stretch into hundreds of percent in annual rates. So to avoid having military personnel subjected to such usury, Congress passed the Military Lending Act, or MLA, in 2006, forbidding payday lenders from charging them more than 36% APR.
Problem was, the MLA contained numerous loopholes. For example, it didn't limit interest rates charged on:
- Payday loans of more than 91 days' duration
- Auto title loans (where a car's pink slip serves as security) for more than 181 days
- Pawn agreements, worded so that they appear to be sale and repurchase contracts
- Any loans at all for more than $2,000
The result: Military personnel currently take out payday loans at rates significantly higher than in the broader civilian population -- 22% versus 16%. And they pay APR well in excess of 36% on these loans. Worse, military personnel may be especially vulnerable to the debt collection practices of payday lenders. According to CFPB, debt collectors are using such unconscionable debt collection tactics as threatening to "report the unpaid debt to their commanding officer, have the service member busted in rank, or even have their security clearance revoked if they don't pay up."
This has to have an impact on military morale. And the Pentagon is not pleased.
Pentagon sends in the Congressional cavalry
Exercising the power of understatement, the Pentagon recently observed that "specific definitions of problematic credit" as worded in the MLA "no longer appear to function well." Accordingly, the Department of Defense published a report [link opens a PDF] urging Congress to pass a law to close the loopholes.
Specifically, the "enhanced protections" would guarantee that military personnel pay no more than a 36% APR on payday loans or auto title loans:
- Of any length
- For any amount
- For no specified amount (i.e., open-ended lines of credit)
Backing the Pentagon's play, CFPB Director Richard Cordray warned Congress last month that "the current rules under the Military Lending Act are akin to sending a soldier into battle with a flak jacket but no helmet."
Let's hope this changes soon.