Seven years ago, Congress passed the Military Lending Act to try to prevent predatory lending to service members.
The Department of Defense had identified a serious problem for morale and force-readiness: the financial troubles soldiers were getting themselves into.
Specifically, they were taking out short-term high-interest cash loans at loan stores that cluster at the entrances to military bases: payday lenders, car-title lenders, pawn shops, installment lenders. All of these non-bank lenders were targeting service members and their families for loans that can prove so costly and complicated, they’re often hard to pay back, leading to an ever-deepening and desperate cycle of debt.
The Military Lending Act set a national interest rate cap of 36 percent APR (annual percentage rate) for loans to military members and their families (excluding mortgages and auto finance loans).
The Act covered three specific types of loans: payday loans (short-term, due in one lump sum after a borrower’s payroll check clears); car-title loans; and tax refund anticipation loans. Further, the loan-terms covered were restricted: 91 days or less for a payday loan, 181 days or less for a car-title loan.
The military said the narrow definitions of ‘covered credit’ under the MLA were necessary to ensure that access to other forms of consumer credit that soldiers might need wouldn’t be curtailed.
There is widespread agreement that the MLA has indeed drastically reduced the availability of payday and car-title loans to military members and their families. Interviews conducted outside two military bases in Georgia — Fort Stewart in Hinesville, and Fort Benning in Columbus — confirmed that most title-loan stores do not serve service members or advertise to them with signs or billboards.
However, there are still plenty of other lenders and high-priced loan products marketed to service members, as a joint investigation by Marketplace and ProPublica found.
The deepening spiral of debt
The MLA did little to regulate open-ended credit, or military installment loans longer than 91 days. Those are still available to service members, and in some cases aggressively sold to them. Some payday and title lenders have found ways to exploit gaps in the MLA, offering longer-term high-interest installment loans, sometimes backed by a car-title, that are not illegal but can send service members into a deepening spiral of debt.
That’s what happened to Mark and Lisa Gerber, of Hinesville, Ga. Mark is an MP on the Fort Stewart Army base. He’s 36, she’s 30, they have three young children. They’ve owned a house, cars, motorcycles. Now they live in a rundown ranch house off-base. And they’ve been through bankruptcy.
The problems started when Mark got a base transfer to Georgia several years ago. They tried to rent the house they owned in Missouri, but their renter—also military—also got transferred, and soon they were having trouble keeping up the mortgage. The house was underwater so they couldn’t sell. They took out an installment loan from World Finance, and at least one other cash loan, this one from an internet payday lender that proved fraudulent.
“And then they called us and said they were foreclosing on the house,” says Lisa, of their troubles.
Mark chimes in: “I deployed shortly after that, so fighting it in court and going through that whole battle wasn’t really an option. And I didn’t want to leave that burden on my wife, so we just filed bankruptcy. And it just kept going down and down, and ultimately we lost our house, I lost my car, pretty much everything.”
Gerber’s chain of command knows about the bankruptcy, and his officers have been supportive so far. But he worries about his security clearance — up for renewal soon — and his future career in the military.
They still struggle from time to time to pay the bills. In fact, they’ve continued to take out military installment loans on occasion to pay for Christmas gifts or small extras they need. They plan to pay it all back, on time, without rolling the loans over, they say.
Soldiers: A financially vulnerable population
Members of that military chain of command are certainly cognizant that they have a financially vulnerable population under their management. It’s almost part of the job description nowadays.
“Soldiers are a sure source of income,” explains Army Captain Brandon Archuleta. “When soldiers are back from Iraq or Afghanistan, they are itching to spend money.”
He says after deployments, soldiers and their families, flush with tax-free earnings and bonus-combat pay, would buy new trucks, big-screen TVs, lawn furniture, toys for the kids, trips and entertainment. That’s to welcome the troops home after stressful, repeated deployments, and finally relax back into civilian life.
Then, the debt-dunning would start: letters from lenders, calls to home, calls to the base looking for commanding officers, says Archuleta.
“On a good day I would be notified by the soldier that a payday lender was looking for them because they are in default,” says Archuleta. “On a bad day, it would be almost like an ambush. A phone call looking for such-and-such soldier. They were relentless.”
Holly Petraeus is assistant director of the new Consumer Financial Protection Bureau in Washington, handling service member affairs. She’s been visiting military bases all over the country, trying to assess through interviews with service members, financial counselors on bases, lawyers and officers, what in the MLA is working, and what needs improvement.
“I think it’s been a vexing problem for the military,” says Petraeus of the continued peddling of some predatory loans to military members and their families.
She points out that the Department of Defense has tried hard to offer alternatives, providing low-cost emergency loans to low-income, cash-strapped military families. But there’s some paperwork involved, and permission from someone up the chain of command may be required, and follow-up financial counseling is strongly encouraged.
“People don’t want to come in and say they’ve messed up their finances,” she says. “And yet, with products where they’re just repeatedly paying large fees to borrow the same small amounts every month—you’re going to end up in a terrible financial mess, and with the real potential of losing your security clearance.”
And, possibly, she says, having to leave the military altogether. Which can have dire consequences for the individual service member, his or her family, and the readiness of the force.
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.
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