OnWatch is a quarterly newsletter of the Fleet Reserve Association

July 10 2017

OnWatch: Lending Predators 

For many young service members, joining the military is a life changing event. Along with this event, for many, comes their first regular pay check.  With these paychecks come all the material items a young service member always wanted. Then come the bills and responsibilities.  For many of us, financial education comes from years of financial missteps.  Sadly, some missteps can be bad enough that we need assistance and there are those lenders willing to take advantage of service members in need. Short-term loan institutions are a common sight at any military facility. They are quite often located directly outside of the main gate. These lenders prey on young service members because of their steady paycheck, their isolation from family and their ignorance of the financial services that are available to them. Congress has taken steps to curtail these loan institutions but that could change if Congress gets its way.  

FRA was at the forefront in successfully supporting the Military Lending Act (MLA) enacted in 2007, which protected service members and their families. Active-duty personnel, active National Guard and Reserves, and their dependents were supposed to be shielded from predatory lending practices. The Consumer Financial Protection Bureau (CFPB) was created in 2010 and within it, is the Office of Servicemember Affairs (OSA). OSA works with bank examiners on military-specific issues to make it easy for military and their families to contact the CFPB with questions or complaints about consumer financial products and services.   

What Congress gives Congress can take away. The House passed the "Financial CHOICE Act" (H.R.10) this past June, which dramatically reshapes the regulation of banking and other financial activities. This legislation includes a number of provisions weakening the CFPB and its OSA.  Section 725 of the bill allows the current mandatory OSA to become a discretionary office, so the Director could decide to eliminate this office at any time. Section 733 would remove CFPB's ability to regulate small-dollar loans such as payday loans, despite evidence of pervasive predatory practices often focused on service members.

By eliminating these offices it exposes service members and their families to unscrupulous business practices of predatory lenders. Payday loans can be a quick solution for short-term financial assistance. Many families turn to these short-term loan institutions as a stopgap between paychecks. However, the high fees and structure of these loans can turn what was supposed to be a short-term loan into a long-term burden. Active-duty, active-reservist or a direct family member are covered by the MLA. Some specific protections in the law include:

• A lender cannot charge more than 36%, including interest and fees, for loans less than $2,000 that are to be repaid in less than 91 days.

• Rolling over a payday loan is a common industry practice used to extend and increase profits on a loan. The MLA prohibits rollovers to prevent excessive charges. 

• You cannot forfeit your rights as a service member.

• Not required to use the military allotment system. Paying by allotment can also lead to forfeiting legal protections such as the ability to dispute a payment.

The best course of action is to have a sound financial plan in place by maintaining a budget and having an emergency fund. A short-term loan should only be used as a last resort. Before you consider taking out a payday loan look to on-base financial assistance. Members of FRA, under certain circumstances, are able to seek financial assistance from their branches. There are many programs and counselors who are willing to assist you in your time of need. Do your research of any lender before taking out a loan and know the state laws that govern your loan. 

If you find yourself in financial difficulties remember you are not the first one. Know what financial services are at your disposal. People in desperate situations often make desperate decisions. These decisions could have lasting effects. Know your rights and stay up-to-date with the latest legislation that could affect your life. The Financial CHOICE Act will go to the Senate for consideration. If it is passed the bill will go to the President's desk for his signature or veto.  Congress does have the authority to take these protections away. Contact your Senator by going to the FRA Action Center and let them know how you feel about Congress exposing service members to the pitfalls of predatory lenders.