If you are one of the brave men and women serving our country in uniform, you face enough dangers. You do not need anyone attempting to take financial advantage of you by capitalizing on the unique challenges of military life.
Unfortunately, you can find many payday loan lenders and other purveyors of short-term, high-interest loans near any military base. Bases are full of young service members with a regular and reliable paycheck — fertile ground for lending groups. According to The Wall Street Journal, payday loan organizations target families with service members at twice the rate at which they target civilian families.
The Military Lending Act of 2006 was designed to prevent lenders from taking advantage of military families by capping the effective interest rate at 36%. However, only three credit products were covered: closed-end payday loans for $2,000 or less and with terms of no more than 91 days, closed-end auto title loans with terms of no more than 181 days, and closed-end tax advance loans against a refund.
Lenders quickly found ways around the law by offering products just beyond the coverage terms, or offering open-ended loans (lines of credit) that were not addressed at all in the original legislation. Their efforts paid off, literally. During the 2012 fiscal year, defense officials reported 1.8 million financial counseling sessions with service members and around 162,000 extended counseling sessions.
Enforcement of the Lending Legislation
The law was amended in 2013 to give the Consumer Financial Protection Bureau (CFPB) the authority to enforce the Military Lending Act. In December 2014, the CFPB produced a report outlining some of the egregious credit terms that military families were facing along with an empirical analysis of these loans (Deposit Advance Products, or DAP in CFPB parlance). Based on the report data, CFPB estimated that over the twelve-month evaluation period, service members took out over $50 million in DAP, totaling an approximate $5 million in fees. Millions of dollars in DAP were procured at annual percentage rates (APRs) greater than 300%.
Expansion of the Act
President Obama announced in 2014 that the Military Lending Act is being expanded to cover a wider range of products and close the omissions that allow lenders to prey on service members. The previous limitations have been abolished and open-ended loans/lines of credit are now included. (The remaining exclusions are loans secured by real estate and certain purchase-money loans such as auto financing.) Creditors are also banned from requiring service members to submit to an arbitration proceeding to settle disputes.
As of October 3, 2017, credit card accounts are also subject to MLA protections when opened by members of the military.
High-Interest Loans Should Still Be Avoided
High-interest payday and advance loans should be the very last resort — there is almost always a better option available. For each branch of the armed forces, including the Coast Guard, there is a non-profit charitable organization, such as the Navy-Marine Corps Relief Society, that can help with urgent financial needs and free financial counseling. In addition, small, interest-free loans (generally $500 or less) may be available without strings attached. Before looking outside for assistance, look within the service family for advice and potential loans.
Even if the new Military Lending Act limits close all the loopholes, lenders will still be offering loans at 36% interest, which is very steep for anyone – especially low-paid junior service members. There is also no guarantee that a clever lender will not find some new loophole.
It is good to see the protections of the Military Lending Act expanded, but ultimately, the best form of protection is self-protection. Learn to live within your means and get into the habit of saving for larger purchases. Establish a rainy-day fund for emergencies. With good saving and spending habits, it will not matter what payday loan vendors are offering — you won't be interested.
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