Giving troops more protections against high-cost debt could save the Defense Department between $13 million and $137 million per year because it would reduce the number of troops involuntarily separated over financial problems, according to DoD estimates.
And some troops and family members have been lying by denying their military connection in order to get high-cost loans, according to defense officials in their proposed rules to expand consumer protections. Officials would eliminate the requirement that a service member or family member have to verify that they are not military-connected; and creditors could rely solely on a database linked to the Defense Manpower Data Center.
Defense officials have proposed a broad expansion of their previous rules implementing the Military Lending Act in 2007, which set a cap of 36 percent on interest that can be charged to service members and their dependents. The new rules would apply to most forms of credit, including credit cards. Previously, DoD’s implementation of the Military Lending Act limited the types of credit covered to payday loans, vehicle title loans and refund anticipation loans.
Each separation costs $57,333
In DoD’s proposed new rules, published Sept. 29 in the Federal Register, part of the justification for expanding the protections is the cost to DoD of involuntary separations because of financial distress. DoD estimates each separation costs it $57,333.
DoD used two models to come up with estimates of how many troops would be involuntarily separated because of financial distress if the credit protections weren’t expanded. One estimate is that there would be about 7,957 separations each year; another estimate is 4,703.
Using those estimates, they calculated savings based on assumptions that the new protections could reduce the number of separations by anywhere from 5 percent to 30 percent.
“The Department acknowledges that the proposed regulation, if adopted as proposed, would not entirely eliminate financial distress among service members,” DoD officials state in the proposed rule. “However, the department expects that extending the protections of [the law] to a broader range of credit products would significantly reduce the incidence of derogatory items in the credit files of service members (maintained by consumer reporting agencies), and thereby improve the service members’ respective capacities to manage and pay debts.”
Tom Feltner, director of financial services for the Consumer Federation of America, said the proposed rules represent a comprehensive approach to the problem of high-interest debt for military families. “First and foremost, we and DoD recognize that service members are in a unique financial position, and there are serious ramifications if they are unable to carry out their duty because of financial instability,” he said.
The Military Lending Act was unprecedented on a national scale for any other segment of the population. As other regulators look at ways to protect consumers, Feltner said, “there are a lot of lessons to be learned from the lenders taking advantage of loopholes in the Military Lending Act,” he said. Some lenders found ways to evade the law by changing the terms or dollar amounts of their loans, calling their payday loans something different.
DoD said the new approach would move away from the narrow, product-by-product approach “that created opportunities to evade the purpose of the [Military Lending Act] and toward a comprehensive, no-gaps approach,” while still giving troops and families access to a wide variety of lending products.
But some of the 40,000 creditors who would be affected by rules expansion, if it becomes reality, contend that it would squeeze service members from options that meet needs that other sources can’t. “If they do this, the military is going to find a pretty big problem,” said one installment lender who is a retired Army first sergeant. “Right now, when I loan money to a soldier, I make sure first he’s tried to get help somewhere else, such as Army Emergency Relief, or the credit union,” he said.
He said a number of service members have written testimonials about the service his loan company provides, and they use their first name and last initial.
This installment lender doesn’t require allotments, he said, and always considers the applicant’s willingness to repay the loan, and his ability to repay. Because the loans are often repaid in less than a year, the annual percentage rate is higher because of fees.
This population of borrowers is riskier — which is why banks won’t lend them money, so they charge more in order to cover their costs and losses, he said.
“If a service member needs $300, $400, $500, where can he go?” For one, he said, “the pawn brokers are going to make more money.”
