Military Crushes Payday Lenders with Shock Awe and a 36 Percent Interest Cap
by Steve Cypher on Tuesday, November 11th, 2008The Department of Defense takes the lead in curbing abusive lending practices by limiting the annual percentage rate on payday loans to 36% for active-duty service members and their families.
Army Intelligence is not a contradiction in terms
Here at Auto Credit Express, we have always been concerned by what we consider predatory lending practices by the payday loan industry. And while those in the industry will weep and wail about all the thousands of sought-after, minimum-wage jobs this regressive practice employs, the fact remains that thousands of people get trapped in a morass of ever-increasing fees that can end up costing them many times the amount of the original loan.
Come to find out, military personnel, especially enlisted service members in the lower ranks, are especially appealing to payday lenders. They receive a regular paycheck, they aren’t going to quit their jobs and most of them have little experience in money management.
Report on Predatory Lending
According to undersecretary of defense David S.C. Chu, ““It’s a big problem for commanders, because what happens is often these households get themselves in over their heads. 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.”
It became such a problem for the military, in fact, that a requirement of the National Defense Authorization Act for 2006 required the Secretary of Defense to submit a report on predatory lending practices directed at members of the Armed Forces and their families.
The report was submitted to Congress on August 6th of 2006. As a result of the report, a new regulation was included with the Defense Authorization Act of 2007. This regulation limits the annual percentage rate on payday loans, vehicle title loans and tax refund anticipation loans to 36% for all active-duty service personnel and their families and took effect on October 1st of 2007.
Report Highlights
Here are some highlights of the report:
Predatory lending practices are prevalent and target military personnel, either through proximity and prevalence around military installations, or through the use of affinity marketing techniques, particularly on-line. Mortgage lending was not considered as part of this report. The predatory lenders reviewed as part of this report provide short term loans (payday, car title, and tax refund anticipation loans) and installment loans (unsecured loans focused on the military and rent-to-own). These lenders have several characteristics in common:
(1). Predatory lenders seek out young and financially inexperienced borrowers who have bank accounts and steady jobs, but also have little in savings, flawed credit or have hit their credit limit. These borrowers are less likely to weigh the predatory loan against other opportunities and are less likely to be concerned about the consequences of taking the loan.
(2). Predatory lenders make loans based on access to assets (through checks, bank accounts, car titles, tax refunds, etc.) and guaranteed continued income, but not on the ability of the borrower to repay the loan without experiencing further financial problems.
(3). Predatory lenders market to the military through their ubiquitous presence around military installations and/or through the use of terms to affiliate themselves with the military. Increasingly the Internet is used to promote loans to Service members.
(4). Predatory products feature high fees/interest rates, with some requiring balloon payments, while others pack excessive charges into the product. The result of their efforts is to obfuscate the comparative cost of their product with other options available to the borrower.
(5). Most of the predatory business models take advantage of borrower’s inability to pay the loan in full when due and encourage extensions through refinancing and loan flipping. These refinances often include additional high fees and little or no payment of principal.
(6). Predatory lenders attempt to work outside of established usury limits, either by attempting to obtain exemptions from federal and state statutes or by developing schemes designed to circumvent existing laws.
The Solution
Here are the protection measures taken by the Department of Defense against predatory lending to Service members:
(1). Require that unambiguous and uniform price disclosures be given to all Service members and family members regard to any extension of credit (excluding mortgage lending). This includes all fees, charges and insurance premiums. These fees must also be disclosed in all advertising materials.
(2). Require a federal ceiling on the cost of credit to military borrowers, capping the APR to prevent any lenders from imposing usurious rates. The 36% rate ceiling must include all “optional” add-ons including credit insurance premiums.
(3). Prohibit lenders from extending credit to Service members and family members without due regard for the Service member’s ability to repay. Lenders cannot use checks, bank account access or car title pawns as security for obligations and restrict their ability to require an allotment for a loan.
(4). Prohibit provisions in loan contracts that require Service members and family members to waive their rights to take legal action. This provision allows service members full legal recourse against unscrupulous lenders.
(5). Prohibit contract clauses that require Service members to waive any special legal protections afforded to them. (Such as the Servicemembers Civil Relief Act)
(6). Prohibit states from discriminating against Service members and family members stationed within their borders, and prohibit lenders from making loans to Service members that violate consumer protections of the state in which their base is located. Service members are entitled to all legal protections of the state they are stationed in.
If it works for the military, it can work for everyone
If the Department of Defense can protect its members by enforcing these rules, why can’t the various states protect their citizens with the same measures? Here at Auto Credit Express, we feel that the time has come for just such a law to be enacted by all the states.
In closing, we’ll leave you with just one of the many stories cited in the report:
“Active duty Air Force E-4, assigned to Maxwell AFB, AL. She was behind in her car and rent payments and quickly needed some cash. Since she had bad credit, she felt a payday loan was a good choice. She originally obtained on $500 loan with an agreement to pay back $600 in two weeks. Unable to repay, she then took out other payday loans and was forced to do multiple rollovers on each one. 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.”
Its small articles like this one that really give the public a misrepresentation of the payday lending industry. I run into about 10 of these a month, and they all say about the same thing: Loan sharks… blah blah blah… baseball bats… blah blah blah… not a legitimate business… etc.
Its funny that we all decide to use this industry as a punching bag to make ourselves feel like we’re actually in control of our society - i mean after all, we are shutting them down in Ohio and other states right? The answer to that is YES.
The downside to this movement is something that is made completely invisible through the media. Why don’t we talk about NSF fees from banks? After all - its the payday lending industry’s main source of income. I would say that 70% of our customers come from distressed bank accounts. Bank accounts which are regularly charged $70 - $100 dollars for over drafting $50 in three transactions. How can you complain about our fee’s if you’re allowing the general public to pay banking NSF charges upwards of 3000% APR?
Why aren’t we complaining about our health care system and its predatory prices?? There are plenty of industries in this world to use as a punching bag, but lets stay off following a movement that was funded by banks and credit unions shall we?
Mo,
Evidently the public isn’t the only sector that has been “misrepresented” by your industry. In this case the military - hardly what I would call the public sector - has also found this industry is predatory. Since it appears your company supplies software to this industry, your opinion is hardly unbiased and I would expect that you would support them. You say that 70% of your customers come from distressed bank accounts, yet neither you nor anyone else in the industry has ever come up with any independent data that suggest you are performing any kind of meaningful service to your customers.
According to the DoD report - which, by the way, is based on fact, it found that payday lenders make loans “based on access to assets … not on the ability of the borrower to repay the loan.” So spare me your “misrepresentation” rhetoric.