Fighting Back! New Law Protects Families From Loan-Shark Lenders
By Pamela Yu
Winter 2007-08
For years, payday lenders and other loan-shark lenders have taken advantage of military families, luring borrowers into high-fee, high-cost loans with empty promises of “easy money.” All too often, these unsuspecting customers were swallowed up in a dangerous spiral of debt – harming families, threatening careers and weakening military readiness.
“What often happens is that these households get themselves in over their heads,” Dr. David S.C. Chu, Under Secretary of Defense for Personnel and Readiness, told American Forces Press Service. “They’re $200 short between now and next payday, but they’re no better off when payday comes, so they need a bigger loan, and it just goes downhill from there.”
Lawmakers are finally biting back with new regulations that should help eliminate excessive interest rates and high fees estimated to cost servicemembers and their families at least $80 million each year.
The new law, commonly known as the Military Lending Act, combats abusive lending practices targeted at military families and places certain requirements and limitations on loans to servicemembers and their dependents. The Department of Defense (DoD) published its final rules to implement the new consumer protections for military families, which had been included as an amendment to the 2007 National Defense Authorization Act. The regulations took effect Oct. 1, 2007.
“This law is long overdue,” said Debbie Matz, executive vice president and chief operating officer of Andrews Federal Credit Union. “Hopefully, these new protections will limit the ability of predatory lenders to prey on the military and afford servicemembers the opportunity to build a sound financial foundation.”
Three Targeted Products
The regulation is narrowly focused on three key consumer credit products the DoD has identified as particularly problematic: payday loans, vehicle title loans and tax refund anticipation loans (RALs).
Under the rule, payday loans are defined as loans that:
- are closed-end credit transactions (generally, credit that is repaid in full, including any interest and finance charges, by a specified future date)
- have a term of 91 days or less
- do not exceed $2,000
- the borrower provides a check or other payment instrument or debit authorization that the creditor agrees to hold
Vehicle title loans are defined as loans that:
- are closed-end credit transactions
- have a term of 181 days or less
- are secured by a motor vehicle registered for use on roadways; the lender retains title to the vehicle until the loan is repaid
Tax refund anticipation loans are defined as loans that:
- are closed-end credit transactions
- the borrower grants the creditor the right to receive all or part of the borrower’s income tax refund or agrees to repay the loan with the refund
For the three products, the Military Annual Percentage Rate (MAPR) for loans to “covered borrowers” – members of the armed forces or dependents of such members – cannot exceed a maximum of 36 percent, inclusive of interest, fees, credit service or renewal charges, credit insurance premiums and other fees for ancillary products sold in connection with the loan.
“The 36 percent cap will slow the predatory lenders down,” according to Jean Ann Fox, director of consumer protection for the Consumer Federation of America. Additionally, the new law says the lender “can’t hold onto the servicemember’s personal check or have electronic access to their bank account as collateral for this type of loan. The threat of the lender depositing the borrower’s check, which would often not clear the bank, has been a key way to trap borrowers in loans they end up paying back many times over in interest.”
Excluded from coverage under the new rule are mortgage loans and refinancings, home equity loans and lines of credit, purchase money vehicle loans, secured personal property loans, loans secured by qualified retirement accounts, and credit that is not subject to current Truth-in-Lending disclosures. Additionally, credit cards are not covered by the new rule.
What To Expect When You’re Borrowing
Military families may be confused when confronted with new loan procedures that creditors have established to comply with the new regulation. Borrowers should be aware of a number of new requirements when shopping for a loan:
Two Differing APRs: Because the MAPR is separate and distinct from the annual percentage rate (APR) already required to be disclosed to all consumers as part of the Truth-in-Lending Act, military borrowers may be confused by seeing two different disclosures that may be inconsistent. For example, the MAPR may appear higher than the APR, leading the military borrower to believe that he or she is obtaining a higher-cost loan than the average consumer. In reality, the MAPR may be higher simply because more fees are factored into the calculation.
Oral Disclosures: Military borrowers must be provided with loan disclosures orally before receiving any disbursements for a covered payday loan, vehicle title loan or tax refund anticipation loan. Thus, servicemembers applying for a loan by mail or online may be given a toll-free number to call to obtain these disclosures. Military borrowers will need to call their lender for the verbal disclosures before the loan funds can be obtained.
Identification as a Covered Borrower: Unlike the Servicemembers Civil Relief Act, military borrowers are not required to notify creditors of their eligibility for the protections afforded under the Military Lending Act. However, lenders offering payday loans, vehicle title loans or tax refund anticipation loans may now ask loan applicants to sign a declaration statement identifying whether they are a covered borrower. This is intended to shield creditors from liability for inadvertent violations of the statute. Any borrower who knowingly makes a false statement when filling out this declaration is subject to criminal penalties.
Law Addresses Longtime Concerns
Prior to the passage of the new law, concerns were mounting with increasing reports of the persistent presence of unscrupulous lenders lying in wait near military bases. A 2005 study by Steven Graves and Christopher Peterson noted that “payday lenders crowd around the gates of military bases like bears in a trout stream.” Indeed, among the military installations examined, most had upwards of 20 – and sometimes as many as 40 – payday lenders within just a few miles of the base gates.
A 2006 DoD report to Congress also observed this growing pervasiveness, noting that “predatory lending practices are prevalent and target military personnel… through proximity and prevalence around military installations,” and that “abusive lenders are purposefully seeking out young and inexperienced military personnel with steady jobs but nominal savings and flawed, little or no credit.”
Military leaders are educating servicemembers about the new law and warning that some lenders are spreading false rumors. According to reports, for example, some car dealers have tried to pressure customers to make purchases because they claim that car loans will no longer be available for military members.
“Commanders, even at the division level, are dealing with the fallout among their people from these kinds of predatory loans,”
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Pamela Yu is Associate Director of Regulatory Affairs for the National Association of Federal Credit Unions (www.nafcu.org).
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Cash Crunch? Where To Get Help
What is being done to ensure servicemembers and their families have access to emergency funding?
First, the Department of Defense (DoD) is stressing that all servicemembers should have an emergency savings fund. Most emergencies can be handled with $500 in savings. This was one of the core messages of the “Military Saves Campaign” held in February and March of 2007. This same message will be re-emphasized during next year’s campaign, Feb. 24 to Mar. 2, 2008.
Second, the military aid societies, champion advocates against predatory lending, continue to provide grants and no-interest loans to servicemembers in need.
Third, the DoD has been joined by the Federal Direct Insurance Corporation (FDIC) to encourage banks and credit unions to develop small, low-interest loans for servicemembers and their families if they are caught in a financial bind. Currently, there are financial institutions on about 51 installations providing these types of loans, and more are considering doing so.
What alternatives do servicemembers have if they need money quickly?
The DoD prefers that servicemembers and their families experiencing financial duress seek help through military aid societies, military banks and defense credit unions rather than through credit products that would more likely mire them in a cycle of debt. These preferred institutions offer established programs and products designed to help servicemembers and their families resolve their financial crises, rebuild their credit rating and establish savings.
The military aid societies are strong advocates for limiting the cost associated with credit and for creditors to develop alternative products for servicemembers who cannot otherwise qualify for loans. Within their own resources, they provided $87.3 million in no-cost loans and grants to servicemembers and their families in 2005. These funds were provided for emergencies and essentials, such as rent, food and utilities.
Where can servicemembers go to get good financial counseling to avoid the cycle of debt altogether?
Financial management courses and personalized support from financial management specialists – often known by their initials “PFMs” – are available at military installations. In the Army, these services are located at the Army Community Service Office; in the Navy and Marine Corps, you’ll find these services and experts at the Fleet and Family Support Office; in the Air Force, they are located at the Airman and
Military OneSource offers free, confidential financial planners and counselors available toll-free 24/7 at 800-342-9647. Military Homefront (www.militaryhomefront.dod.mil) is the official DoD website for reliable quality-of-life information to help servicemembers and their families, leaders and service providers (see the “Personal Finance” section).
Banks and credit unions located on military installations are excellent resources. They provide financial management education in addition to lending services.
Source: Department of Defense. For a complete FAQ on predatory lending, visit www.militarymoney.com.
