Clarification: This article cites a 2005 study by the Center for Responsible Lending, in which the CRC reported that 20 percent of active-duty military members have taken out a payday loan and that members of the military were three times more likely than civilians to use these types of loans. A 2009 report by the Financial Industry Regulatory Authority (FINRA) came to a different conclusion, finding that 21 percent of all military members who participated in its study had used a form of non-bank borrowing, and that 7 percent had taken out a payday loan. These numbers were even more significant when restricted to enlisted and junior NCO military members, of whom 32 percent had used non-bank lending and 11 percent had taken out a payday loan. By comparison, 24 percent of civilians used one of these methods, and 9 percent had taken out a payday loan.
Members of America's military face threats to life and limb around the world every day, but it's a domestic threat that has recently put the top brass on the offensive on the homefront — predatory lenders.
In 2006, the Department of Defense researched the problem, interviewing soldiers who had been devastated by payday loans (.pdf file). While each story is unique, they all include the same basic series of events: A soldier takes out a seemingly simple loan and soon finds him or herself drowning in an ever-deepening morass of debt. Take, for example, the case of an Air Force sergeant who got behind on her car payments and rent. To catch up, she took out a $500 payday loan, agreeing to pay back $600 in two weeks. Things spiraled downhill from there:
"Unable to repay, she took out other payday loans ... to pay off these loans, she contacted an installment loan company who provided her with a $10,000 loan at 50 percent APR. Total cost to pay off the payday loans was $12,750 and her total obligation to the installment loan company was $15,000. Her financial problems were a contributing factor to her pending divorce."
It isn't hard to see why so many members of the military borrow from payday lenders. Across the country, the areas around military installations are almost always cluttered with payday lenders, rent-to-own stores and other companies that offer fast cash for desperate borrowers. This is no accident: Military personnel and their families are ideal targets for unethical lenders. Many enlisted personnel are poorly paid, and the seemingly simple credit terms offer what appears to be an easy solution to a temporary problem.
These factors, combined with haphazard regulation, have made the cash-to-payday industry one of the biggest threats facing military families. Military leaders have identified debt as a "threat to military readiness, and service members overwhelmingly rate finances the second-most stressful part of the military lifestyle, outpacing family separations and deployments.
The perfect target
In 2005, the Center for Responsible Lending determined that 20 percent of active-duty military members had taken out a payday loan. In fact, members of the military were three times more likely than civilians to go to a payday lender. In 2007, Congress passed legislation making it illegal to charge service members more than 36 percent interest on a loan. Since then, the Consumer Financial Protection Bureau has targeted lenders who prey on military personnel. Even so, usurious lending continues to be a problem for many members of the military
Part of the problem is that military personnel remain nearly perfect victims for predatory lenders. The vast majority — more than 84 percent — are under 25 years old and are stationed far from home, which means that they cannot easily call on families or friends for help when they get into debt. While the military offers financial support resources, military culture strongly discourages indebtedness: Soldiers who get in over their head can be punished, stripped of their security clearances and even discharged. For many young servicemen and women, the fear of disciplinary action keeps them from taking advantage of low-interest military loans and free debt counseling.
Low salaries also make military personnel into promising targets: 74 percent of soldiers are in the six lowest ranks, and most make less than $31,000 per year. On the other hand, it's hard to imagine a more stable group of borrowers: Unlikely to be fired and unable to quit, there is little question that military borrowers will continue to have consistent income for the duration of a loan, especially if — as is the case with payday borrowing — the loan only extends for a couple of weeks. Soldiers also are required to have checking accounts for direct deposit, which makes it easy for lenders to access their money.
Discussing the problem, Navy Capt. Bill Kennedy noted that, even under the best of circumstances, enlisted members of the military skirt the edges of poverty: "An E-3 (one of the lower ranks, variously a seaman, an airman first class, a Marine lance corporal and Army private first class), married with one child, after base pay and other allowances has no money left at the end of the month. Zero ... a car repair or even a little mismanagement can wreck 'em." Under these circumstances, it's easy to understand how this California-based Army private got into trouble through a simple car loan:
"He received a car loan for $42,000 at 24.1 percent APR. In addition he had an installment loan for $2,500. As an E-1, his take home pay is approximately $2,340, and with a 60-month pay back, his monthly payment on the car would be $1,211. .. After 60 payments, he will have paid the equivalent of a year's salary ($30,292) in interest."
The private in this case got in over his head with interest payments that were comparatively low. Most military service members who take out predatory loans pay rates that are much higher. In its 2005 report, the Department of Defense determined that — factoring in the steep fees than many lenders tack on to already-high interest rates — the APR on payday loans ranged between 390 percent and 780 percent. At these rates, borrowers often found themselves unable to pay off their loans in the required time. To keep their heads above water, many borrowers took out loans from multiple lenders, "flipping" their payday loans.
Caught in a debt trap, the average borrower took out nine loans per year, paying back $834 for a $339 loan. A large part of the problem was a legal loophole: Many states only regulate loans that are made to permanent residents. Since most military personnel are not posted to their home states, lenders who targeted them were able to operate under the radar, free of regulation.
Attacking the problem
The 2006 passage of the John Warner National Defense Authorization Act closed many of the loopholes that enabled exploitative lenders to do business. To begin with, the law made it illegal for lenders to charge more than 36 percent APR on loans to military members or their families. Additionally, a variety of rules made it impossible for lenders to roll over loans, access borrower savings accounts, conceal annual percentage rates and use other tricks that they commonly employed to deceive borrowers. Perhaps most notably, the law put some weight behind its words, classifying many forms of exploitation as misdemeanors, punishable by up to one year in prison.
In spite of the Warner act, however, soldiers still get in trouble, as the Huffington Post's Chris Kirkham reported in January. In response, the military has redoubled its efforts to educate its members and protect them against predatory lenders.
In January, Holly Petraeus agreed to head up the Office of Servicemembers' Affairs in Elizabeth Warren's Consumer Financial Protection Bureau (CFPB). The wife of Gen. David Petraeus and daughter of the former commandant of West Point, Holly Petraeus has long focused on the financial problems facing military families. Prior to working with the CFPB, she was director of Military Line, a partnership with the Better Business Bureau that provides financial education for military families. In her new position, she plans to take a more active role in directly fighting predatory lenders and other companies that exploit military families.
Additionally, debt-counseling services and low-interest loans are available to military families that find themselves in desperate need of money. Among other groups, the Navy-Marine Corps Relief Society, Army Emergency Relief and the Air Force Aid Society a provide emergency loans, and Military Line continues to provide financial education and dispute resolution for service members and their families.
Additionally, the military has recently taken a more active role in the financial lives of its members with Military Saves, a program that helps units and individual soldiers to set up — ad use — savings accounts. In spite of all of this, however, strictures against indebtedness still encourage soldiers to keep their finances private. It remains to be seen if these changes in programs can create a change in military culture that will protect our troops and their families from financial ruin.
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