Protecting troops from a different kind of harm — predatory loans

At Fort Stewart in Hinesville, Georgia, the Army Community Service Center is home to a Financial Readiness Program, with a team of counselors and lawyers to help prepare soldiers for deployments, and for financial life back home.

Military families could be considered lucky when it comes to consumer credit. The Military Lending Act, enacted seven years ago, caps annual interest (APR) at 36 percent and bans short-term payday and car-title loans, as well as tax refund anticipation loans.

The goal was to protect military families from financial hardship, reduce the risk to security clearances (when, for instance, soldiers default on debts, or suffer bankruptcy or foreclosure) and to ensure the readiness of the force. 

Military members aren't paid very much -- starting salaries for enlisted personnel are in the low $20,000 range. But they get a steady paycheck, often boosted by combat pay. And they face unique stresses and challenges, including deployment, that make coping with family emergencies difficult. Long-term financial planning is challenging, too. 

All this makes service members particularly vulnerable to predatory lenders. And as Marketplace and ProPublica discovered in a joint investigation, many non-bank financial companies -- installment lenders, and even title lenders and payday lenders -- are getting around the rules of the Military Lending Act to continue lending at very high interest to service members. 

Which in turn has spurred military brass, consumer advocates and members of Congress to fight back.

The military economy

We start our story in Hinesville, Georgia -- home to the Army’s Third Infantry Division at Fort Stewart.

The Waffle House sits along a major boulevard through town. A waitress greets a steady stream of women and men in uniform, some with family members in tow.

"Thursday is Sergeant’s Day," she says, as a short-order cook slaps eggs, bacon and grits onto serving plates. "This is like their second home, I guess."

The most popular orders on a Thursday?

"The all-star, or the Texas bacon-cheese-steak melt -- yes sir," she politely responds. "$6.90 plus tax."

Businesses in a town like this feed off of military dollars. Outside the security gate to the sprawling base, the signs shout out to service members, offering sandwiches, haircuts, military gear, tattoos. Also, cash now. A cluster of loan stores is prominent here: car-title, pawn shops, installment lenders ‘to the military.’

"Any time when there’s money like this to be made" says Roy Barnes, former Georgia governor and a long-time consumer lawyer, "you’re going to see skirting of the law."

Barnes is referring to the myriad ways lenders have found to offer high-cost, short-term borrowing to military members that is either flat-out illegal, or exploits gaps in the Military Lending Act.

His law office has filed a class-action lawsuit (Jason Cox et. al v. Community Loans of America) against one of the country’s biggest car-title lenders. Barnes alleges the company, which operates about 900 loan stores in multiple states, gave service-members car-title loans dressed up as pawn transactions, with rates as high as 160 percent. He says that’s a ruse and violates the Military Lending Act. Repeated renewals piled up the interest and fees.

"All of these loans had been flipped," he says of the loans of the four military borrowers he’s representing. "They never get paid off. After you get in debt to them, you’re theirs, because you can’t get out of debt."

Gaps in the Military Lending Act 

Consumer advocates have identified plenty of other lenders exploiting gaps in the Military Lending Act. These lenders charge interest as high as 400 percent, on loans that are paid back in monthly installments. The law doesn't cover payday loans spread out over more than three months, or car-title loans that last more than six months. 

In our investigation, Marketplace and ProPublica saw documentation for two loans that were given to military members, and in which a car title was pledged as collateral. One loan had an APR (annual percentage rate) of 125 percent. The other’s APR was 400 percent. In that case, the borrower would have paid back more than $17,000 dollars (in principal, interest and fees) on a $1,600 loan, had he paid it to term. He couldn’t, though, and his 1998 Ford Expedition was repossessed.

And those loans were legal, because they lasted two years or more.

Pentagon spokesman Marcus Beauregard says the Defense Department is working on new regulations to address shortcomings in the law. DOD is working with the new Consumer Financial Protection Bureau to identify the types of loans that are most likely to send service members into a deepening cycle of debt. And it will survey service members about their experiences, as was done before passage of the Military Lending Act in the mid-2000s. The military also continues to offer extensive financial counseling, family budgeting help and emergency low-cost loans to service members.

"Certainly the issue [of predatory lending] is not seen as having gone away," says Beauregard. "We have had many reports that the Military Lending Act has had the desired impact in terms of the kinds of credit that were covered by the regulation that implemented the act, namely, payday loans, vehicle title loans and tax refund anticipation loans. We are also receiving reports from consumer advocates that the marketplace has changed and that some of these high-cost, small-dollar loans have changed in their definition. So regulation may not be covering all the opportunities that are out there."

The original rules that implemented the Military Lending Act specifically excluded installment loans and open-ended credit, as well as mortgages and auto loans. That was to address concerns within the military and the financial industry that regulating these types of loans would limit access to appropriate credit products for military members.

Senator Dick Durbin of Illinois says he also wants the Defense Department to fight back against the endless creativity of predatory lenders, as they adapt their products to continue lending at very high interest to the troops.

"I’m finding so many examples of the exploitation of the military and their families," Durbin said in an interview from his Chicago office, soon after introducing legislation to more tightly regulate consumer loans. "And maybe, just maybe, I can convince my colleagues to protect all American families from these abuses."

Last month, Durbin and four other Democrats (Jeff Merkley (D-OR), Richard Blumenthal (D-CT), Sheldon Whitehouse (D-RI), and Barbara Boxer (D-CA)) introduced the Protecting Consumers from Unreasonable Credit Rates Act of 2013. It would set a 36 percent cap on interest and fees for all consumer credit transactions. In essence, it would extend the 36 percent cap for military members and their families to all consumer loans for the entire country.

The financial industry strongly opposes such legislation, and it’s not likely to get very far in the Senate, given likely opposition by most Republicans in that body.

Marketplace and ProPublica asked World Finance, one of the nation’s biggest installment lenders with about five percent of its outstanding loans to service members or their families, what the impact would be of a 36 percent across-the-board cap on interest and fees.

In a written statement, the company’s senior counsel wrote: "Any federal law that would impose a national 36 percent or similar annualized credit rate cap on our services would, if enacted, almost certainly eliminate our ability to continue our current operations. Any such restrictive legislation would certainly eliminate access to credit to a very large segment of the population."

Senator Durbin says he’s not deterred by such pronouncements.

"Well, I've heard this argument over the years," says Durbin, "that 36 percent just isn't enough of a return. Historically, 36 percent has been the accepted interest rate that most responsible financial institutions can profit under. It was more than enough for a good bank. And in some cases, if 36 percent can’t bring you a return, perhaps the loan should not be written."


Read other stories from the Marketplace and Propublica joint investigation "Beyond payday loans: Installment lending and the cycle of debt." Explore the whole series here.

About the author

Mitchell Hartman is the senior reporter for Marketplace’s Entrepreneurship Desk and also covers employment.

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