Menus Subscribe Search

ProPublica

service-members-back

(Photo: Aspen Photo/Shutterstock)

Protecting Our Service Members From High-Cost Lenders

• June 06, 2014 • 2:00 PM

(Photo: Aspen Photo/Shutterstock)

Acknowledging that a previous law did not go far enough, the Defense Department says it needs to expand rules.

The Department of Defense, attempting to thwart the ever-changing tactics of high-cost lenders, plans to dramatically broaden a federal law that sought to protect service members by capping the interest rate on loans made to troops.

When the Military Lending Act was enacted in 2007, it narrowly focused on how much interest lenders could charge on two types of loans: payday and auto-title. But as ProPublica and Marketplace reported last year, high-cost lenders easily circumvented the law, peddling credit from stores that often line the streets near military bases. In a newly released report to Congress, the Defense Department acknowledged that the law has proven inadequate and said it is working on new, “more comprehensive” rules.

The report, completed in April, said a survey of service members found the use of high-cost loans is widespread. Under current rules, the Military Lending Act (MLA) caps certain categories of loans at a 36 percent annual percentage rate. But the Defense Department’s survey found that 11 percent of service members reported taking out a loan above that limit in the past year.

In response to crackdowns by federal and state regulators, high-cost lenders have been busy transforming their offerings over the past several years.

Service members are prime targets for high-cost lenders, the report says. They often aren’t financially savvy—”generally high school graduates who may have started college.” They’re young: 43 percent of service members are 25 years old or younger. And they tend to start families earlier, adding to their financial pressures. From the results of the survey, the Defense Department estimated that up to a quarter of service members “may face emergency financial short-falls and indicate difficulties managing their finances and avoiding problems with credit.”

In response to crackdowns by federal and state regulators, high-cost lenders have been busy transforming their offerings over the past several years. Instead of the typical payday loan, which carries an annual rate above 300 percent and is due in full after two weeks, lenders have increasingly been offering installment loans that last several months. They, too, can have sky-high annual rates, but the rate on installment loans isn’t capped under the MLA. Neither is the rate for open-ended credit: A lender can legally offer a credit line with a 300 percent APR to a soldier.

Because they’re not covered by the MLA, installment lenders are also free to lard loans with nearly useless insurance products that serve mainly to boost the cost of the loan. The report notes that if the MLA were extended to cover installment loans, these types of add-on products would be limited. Under the MLA, the Defense Department has the power to define what sorts of loans are covered.

“[W]ithout revising the definitions of credit in the MLA to encompass installment and open end credit, the MLA will lose its effectiveness,” the report says. But if the DoD simply prohibited installment loans with an APR above 36 percent, lenders might find another type of loan to circumvent the law. Accordingly, the Defense Department concludes, “The complexity of the marketplace appears to be better accommodated with a more comprehensive approach.” As indicated in the report, such an approach would ban any loans above 36 percent, perhaps with a few special exclusions.

Meanwhile, the situation is very different for high-cost loans targeted at everybody else. There is no federal law limiting high-cost loans to civilians, but the Consumer Financial Protection Bureau is working on new rules for payday lenders that will affect all consumers. “I think that the challenges of defining high-cost credit under the MLA are the same challenges of defining high-cost credit for the civilian population,” said Tom Feltner, director of financial services at the Consumer Federation of America.

But where the Defense Department can simply institute a broad 36 percent rate cap, the CFPB’s hands are tied. The 2010 financial reform bill that created the agency forbade it from capping interest rates. That makes CFPB’s job much more of a challenge, said Feltner.


This post originally appeared on ProPublica as “To Protect Service Members, Defense Department Plans Broad Ban on High-Cost Loans” and is republished here under a Creative Commons license.

Paul Kiel

A weekly roundup of the best of Pacific Standard and PSmag.com, delivered straight to your inbox.

Recent Posts


September 16 • 12:00 PM

What Makes You So Smart, Brilliant 12-Year-Old?

Charles Wang is going to rule the world.


September 16 • 10:09 AM

No Innovation Without Migration: The Harlem Renaissance

The Harlem Renaissance wasn’t a place, but an era of migration. It would have happened even without New York City.


September 16 • 10:00 AM

A Law Professor Walks Into a Creative Writing Workshop

One academic makes the case for learning how to write.



September 16 • 7:23 AM

Does Not Checking Your Buddy’s Facebook Updates Make You a Bad Friend?

An etiquette expert, a social scientist, and an old pal of mine ponder the ever-shifting rules of friendship.



September 16 • 6:12 AM

3-D Movies Aren’t That Special

Psychologists find that 3-D doesn’t have any extra emotional impact.


September 16 • 6:00 AM

What Color Is Your Pygmy Goat?

The fierce battle over genetic purity, writ small. Very small.



September 15 • 4:00 PM

The Average Prisoner Is Visited Only Twice While Incarcerated

And black prisoners receive even fewer visitors.


September 15 • 2:00 PM

Gambling With America’s Health

The public health costs of legal gambling.


September 15 • 12:23 PM

The Scent of a Conservative

We are attracted to the body odor of others with similar political beliefs, according to new research.


September 15 • 12:00 PM

2014: A Pretty Average Election

Don’t get too worked up over this year’s congressional mid-terms.


September 15 • 10:00 AM

Online Harassment of Women Isn’t Just a Gamer Problem

By blaming specific subcultures, we ignore a much larger and more troubling social pathology.


September 15 • 8:00 AM

Atheists Seen as a Threat to Moral Values

New research attempts to pinpoint why non-believers are widely disliked and distrusted.


September 15 • 6:12 AM

To Protect Against Meltdowns, Banks Must Map Financial Interconnections

A new model suggests looking beyond balance sheets, studying the network of investment as well.


September 15 • 6:00 AM

Interview With a Drug Dealer

What happens when the illicit product you’ve made your living off of finally becomes legal?


September 15 • 4:00 AM

A Feeling of Control: How America Can Finally Learn to Deal With Its Impulses

The ability to delay gratification has been held up as the one character trait to rule them all—the key to academic success, financial security, and social well-being. But willpower isn’t the answer. The new, emotional science of self-regulation.



September 15 • 2:04 AM

No Innovation Without Migration: Do Places Make People?

We know that people make places, but does it also work the other way?


September 12 • 4:00 PM

Life, Liberty, and the Pursuit of Plastic Bags

California wants you to pay for your plastic bags. (FYI: That’s not an infringement on your constitutional rights.)


September 12 • 2:00 PM

Should We Trust the Hearts of White People?

On the 50th anniversary of the Civil Rights Act, revisiting a clip of James Baldwin on the Dick Cavett Show.


September 12 • 12:00 PM

Big Government, Happy Citizens?

You may like to talk about how much happier you’d be if the government didn’t interfere with your life, but that’s not what the research shows.


September 12 • 10:00 AM

Whispering in the Town Square: Can Twitter Provide an Escape From All Its Noise?

Twitter has created its own buzzing, digital agora, but when users want to speak amongst themselves, they tend to leave for another platform. It’s a social network that helps you find people to talk to—but barely lets you do any talking.


Follow us


3-D Movies Aren’t That Special

Psychologists find that 3-D doesn't have any extra emotional impact.

To Protect Against Meltdowns, Banks Must Map Financial Interconnections

A new model suggests looking beyond balance sheets, studying the network of investment as well.

Big Government, Happy Citizens?

You may like to talk about how much happier you'd be if the government didn't interfere with your life, but that's not what the research shows.

Give Yourself a Present for the Future

Psychologists discover that we underestimate the value of looking back.

In Soccer as in Art, Motifs Matter

A new study suggests a way to quantitatively measure a team’s style through its pass flow. It may become another metric used to evaluate potential recruits.

The Big One

One in three drivers in Brooklyn's Park Slope—at certain times of day—is just looking for parking. The same goes for drivers in Manhattan's SoHo. September/October 2014 new-big-one-3

Copyright © 2014 by Pacific Standard and The Miller-McCune Center for Research, Media, and Public Policy. All Rights Reserved.