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Defense officials must clamp down on more predatory lenders to force troops away from high-cost credit options, according to a Defense Department report recently submitted to Congress.
To that end, defense officials are crafting more comprehensive rules to increase protections for troops. The proposed changes may be published in the Federal Register this summer, DoD spokeswoman Joy Crabaugh said.
The Military Lending Act of 2006 was designed to cap loan interest rates for service members at 36 percent. But according to a survey conducted as part of the report, 11 percent of enlisted troops are using payday loans, vehicle title loans, bank deposit advances, pawn shops and installment loans structured in such a way that their interest rates exceed 36 percent.
The report was submitted to Congress on April 29. A copy was obtained by Military Times.
“DoD is not likely to persuade service members through current financial literacy programs alone that using high-cost loans is not in their long-term best interest,” states the report.
If troops were blocked from using such high-cost loans, they might seek out lower-cost options that they otherwise might not consider, such as loans from military relief societies, military banks and credit unions, or financial counseling.
However, most enlisted members who responded to the survey said they would be embarrassed to seek help from their service’s relief society, and half thought their commander would find out.
Under the Military Lending Act, lenders of certain types of consumer credit cannot charge military borrowers an annual percentage rate of more than 36 percent.
But Congress gave DoD broad authority to define the types of loans covered under the law. DoD’s 2007 implementing regulations address traditional payday loans, car title loans and refund anticipation loans. The report notes that some lenders have morphed their products in ways that skirt DoD’s limited regs and continue to charge high interest rates to troops.
Congress last year directed DoD to conduct surveys of troops, financial counselors and legal assistance attorneys, and to seek input from consumer advocates and the financial services industry, to determine if further protections are needed for military borrowers.
Most service members who responded to the survey have access to safe, low-cost credit, have few problems with finances, and report little use of high-cost credit.
However, for those who have used the high-cost loans, the impact is heavy. Of the 11 percent of enlisted troops who used high-cost loans, more than four out of five experienced at least one financial difficulty in the previous 12 months, compared with 48 percent of all enlisted members who took the survey.
The 211 financial counselors and 59 legal assistance attorneys who responded to a separate 10-question DoD survey rated the high cost of credit as the most common negative characteristic of credit that contributed to the problems experienced by their clients.
“It is concerning that 11 percent of enlisted service members are turning to credit in excess of 36 percent, seven years after the passage of the Military Lending Act,” said Tom Feltner, director of financial services for the Consumer Federation of America. “It’s a continuing problem among service members.”
“Simply warning them about the impact is not enough,” he said. “That gets to the heart of the original purpose of the Military Lending Act — to restrict high cost credit and allow other options to thrive so that they become the norm rather than the exception.”
Consumer advocates have long pressed DoD to broaden its definitions under the law — and defense officials now seem to agree, with the report noting that the ability of lenders to find ways around the 36 percent rate cap “is becoming more evident and of greater concern.”
Not surprisingly, some lenders are unhappy with DoD’s shifting stance.
“Now they’re throwing up their hands and they’re going to ban everybody,” said Bill Himpler, executive vice president of the American Financial Services Association, a trade group for companies offering installment loans.
“Our contention is that the installment lending model provides a road map out of debt,” he said.
On a payday loan of $1,000, he said, a borrower would have to pay back $1,200 in two weeks. That works out to an APR of about 591 percent, according to the Consumer Federation of America.
In contrast, Himpler said, with an installment loan of $1,000, “the borrower pays back an extra $125 to $130 in interest a month over a year’s time, an APR of about 75 percent to 85 percent.
“At the end of the year, the debt is gone and the [borrower’s] performance is reported to the credit bureau. It can enhance your credit profile,” he said.
Lenders in his association work with borrowers to make sure they can afford the payments, he said, and repayment is more manageable over a year’s time.
Others are waiting to see the new rules. “We all have to wait until those rules are developed before we can analyze the impact,” said Roland “Arty” Arteaga, president and CEO of the Defense Credit Union Council. Credit unions on military installations “totally support DoD establishing rules to protect troops against predatory lenders.”
However, he said his organization believes the current DoD regulations are sufficient.
Other findings from the DoD survey:
■About 2 percent of enlisted troops said they had used payday loans in the previous 12 months. Of those, about half got their payday loans from storefronts, and half from online companies. That 2 percent is less than half of the usage rate for payday loans in the civilian population overall. The national average usage rate for payday loans is 5.5 percent, but usage by state varies from 1 percent to 13 percent, according to a report released in January by Pew Charitable Trust’s Small-Dollar Loans Research Project.
■About 4 percent of enlisted troops said they had taken out vehicle title loans — using their car title as collateral for a short-term loan. Of those, just under half said they got the loans from storefronts; 13 percent obtained them online, and 42 percent said they didn’t know where they got them.
■The majority of enlisted members — 88 percent — said they did not think they would be inconvenienced if they didn’t have access to high-cost credit products with interest rates in excess of 36 percent, such as payday loans, vehicle title loans, installment loans, overdraft loans, and bank direct deposit advance loans.
Of the financial counselors and legal assistance attorneys surveyed, 87 percent said the 36 percent APR is not too restrictive; 44 percent of those surveyed said that a 36-percent APR is too high.
Pinpointing how many DoD survey respondents who used high-cost loans actually paid interest rates above 36 percent is difficult.
Of the 2 percent of enlisted troops who used payday loans, about a third said the loans were for 91 days or fewer — which would violate the law if the interest rate was over 36 percent. Of the 4 percent of enlisted troops who used vehicle title loans, 16 percent said the loans were for 181 days or fewer, which also would violate the law if the interest rates were above 36 percent.
DoD fielded the survey from Sept. 5 through Oct. 22, garnering 4,839 active-duty responses.