Partners, Volume 15, Number 2, 2005

Protecting Our Military from Predatory Lenders

The men and women who volunteer to serve in the military, many of whom enlist straight out of high school, often have limited experience in financial matters.

As they embark on a tour in the military, they may incur a number of expenses they have not had to budget for in the past. The average private or seaman already lives on a relatively low income, and he or she typically cannot afford the burden of unreasonably high interest rates.

Jim, who just graduated from high school, is excited about his new career in the military. He can’t believe he has a job that provides room, board, food, and work clothes in addition to a paycheck. The first thing he does is purchase his dream car. Within a few months he acquires three credit cards and uses them to buy a stereo and an assortment of other electronic luxuries.

When Jim realizes he has other expenses he didn’t anticipate, he goes to the local bank for a loan, but he soon learns he has too much debt to qualify. As a last resort he goes to a payday lender that has been sending him solicitations in the mail. He borrows just enough to get by, but he finds he doesn’t have money to pay off the debt at the end of the month. So he refinances this debt over and over again to keep current.

Jim is a fictional character, but his story is typical for a large number of our service members throughout the world.

According to the Fleet Reserve Association (FRA), a congressionally chartered nonprofit organization representing the interests of U.S. Navy, Marine Corps, and Coast Guard personnel with regard to compensation, health care, benefits, and quality-of-life programs, the problem of indebtedness can affect service members’ ability to function effectively.

“This problem is not just a personnel issue, but it’s viewed as a readiness challenge. If service members fall into debt, they run the risk of being unable to deploy. They can lose security clearances and, more importantly, will not be able to effectively focus on accomplishing their mission if consumed with concerns about indebtedness,” says an FRA representative.

Protective legislation
A bill has been proposed in Congress to protect our service members and their dependents against the unethical practices of predatory lending. The Servicemembers Anti-Predatory Lending Protection Act would prohibit creditors from imposing an annual percentage rate (APR) greater than 36 percent on consumer credit extended to a service member or service member’s dependent. (The average APR for a payday loan is 300 percent.)

The proposed law mandates loan disclosures, including a statement of the APR for extension of credit, and a clear description of the payment obligations.

The legislation would also protect service members who are forced to continue taking out loans with higher and higher APRs that make it impossible to repay the original loan. Stipulations prohibit a creditor from automatically renewing, refinancing, or consolidating credit with the proceeds of other credit extended by the same creditor without making a new loan document including the required loan disclosures, to be signed by the service member.

The Servicemembers Anti-Predatory Lending Protection Act would preempt any state law, rule, or regulation, including any state usury law, inconsistent with the legislation, unless state regulations provided additional protection. Criminal penalties are prescribed for violations.

The Honorable Sam Graves of Missouri, who introduced the bill (HR 97) in the U.S. House of Representatives, pointed to recent credit industry studies which found that 26 percent of military households have done business with high-interest instant lenders.

“We can do better for our troops. These businesses are geared toward and are targeting our soldiers. Our men and women in uniform should not be treated like a niche market; we depend on them for our freedom and owe them our gratitude,” Graves says.

The bill, which was introduced in January of 2005, has been referred to the Committee on Veterans Affairs, and, as of July 2005, it remained in committee.

Financial education is necessary but not sufficient
A number of banks and credit unions have partnered with military bases to provide financial education for new recruits and other service members who find themselves in financial trouble. The Department of Defense also collaborated with the FDIC to offer financial education workshops at more than 3,000 military installations around the world. The FDIC’s Money Smart financial education program curriculum consists of 10 easy-to-teach modules on basic financial topics such as choosing and maintaining a checking account, budgeting basics, the importance of saving, and how to build and maintain good credit.

While these financial education seminars are helping many of our service members make wise financial decisions, additional measures are clearly needed to deal with the unethical business of predatory lending.

An important debate
Recognition of this problem by the Department of Defense is a positive step, as is the effort to enact legislation to address many of these issues. However, questions have arisen concerning the implementation of a law that requires separate interest rates, disclosures, and terms for the military. If we view our military personnel as a microcosm of the general public, perhaps we really need broader legislation that protects the average citizen as well as military service members. Ongoing debate about this issue ultimately helps build national momentum against predatory lending practices.

This article was written by Michael Milner, regional community development director at the Atlanta Fed’s Birmingham Branch.

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