Military Predatory Lending

The first thing to understand about predatory lending is that you are the prey.

If you are or were in the military, that obviously should not be the case. Your service should earn you a level of respect and protection from such scammers. But the people who use predatory lending tactics to enrich themselves have no respect for their victims, including military service. To them, being in the military simply means you have a steady income that they can divert into their own pockets.

In other words, you are more desirable prey than most.

Payday loans are a common form of predatory lending. Often available in storefront businesses, these loans are made to people with only a personal ID, a checking account, and income from a job or government benefits. These lenders give you money upfront, which can help in the short term, but their goal is to keep you in debt, via:

1. Triple-digit interest rates.
2. Short loan terms that are difficult to pay and result in a loan rollover.
3. A balloon payment due after two weeks.
4. Loan flipping, which means new loans and larger debts to pay for the original loan. Some 90% of the payday loan industry’s revenue comes from making more and larger loans to the same customers.
5. No consideration of your ability to pay. Unlike a bank or other reputable lender, your income and credit history determine how much you can borrow. Payday lenders encourage their prey to borrow the maximum available.

Military families are at risk of such predatory lending practices, with dramatic results. Someone who is worried about the impact of predatory lending on their families is bound to be distracted from their work. Serious debts can actually lead to the loss of your security clearance – a person in unmanageable debt is vulnerable to nefarious individuals or organizations.

The life of a military family can be difficult financially and at times can make it susceptible to the appeal of quick cash. Moving, the absence of a parent for significant periods of time, additions to a young family – all of these can put stress on a family that a quick loan can relieve.

Military Lending Act

In recognition of those unique challenges, Congress in 2006 approved the Military Lending Act in a bipartisan effort. The MLA was drafted and passed in response to a U.S. Department of Defense study that found active military were often targets of predatory lenders and that poor credit and debt history was resulting in dire consequences to security clearances and family stability.

The most significant aspect of the MLA is the 36% APR cap it places on lenders. The MLA was revised in 2013 and 2015 to strengthen government oversight agencies and cover credit cards, overdraft lines of credit, deposit advance products, and some installment loans.

Types of Credit Covered by Military Lending Act

The original MLA covered:

1. High-interest payday loans: Short-term loans that must be paid in full within two weeks.
2. Vehicle title loans: The title for your personal vehicle is held as collateral for a short-term loan with interest rates as high as 300% APR.
3. Tax refund anticipation loans: Similar to payday loans except that, instead of your next paycheck, you borrow against your upcoming income tax refund.

The 2015 revisions added all credit covered in the Truth in Lending Act:

1. Credit cards (opened after Oct. 3, 2017)
2. Pawn loans
3. Some installment loans (though not secured loans)
4. Open-ended credit
5. Overdraft lines of credit (although not other overdraft services)
6. Some student loans
7. Military debt consolidation loans (a home equity cash-out loan for those with a VA mortgage)

There are restrictions under the MLA. If a borrower’s credit score is too low, the borrower may not qualify for MLA-protected loans.  One solution may be non-profit credit counseling to help improve your credit profile.

Signs of a Predatory Loan

There will be no sign advertising “Predatory Lending Here!” But there will be signs that you’re dealing with a predatory lender if you keep your eyes and ears open.

Watch out for:

1. Triple-digit interest rate: Payday lenders typically charge fees equal to 400% APR and even higher. The loans are typically short-term, so do the math. Anything above the Military Lending Act’s 36% ceiling should be a red flag.
2. Short minimum loan term: Some 75% of payday loan customers are unable to repay their loan within two weeks. They are then forced to get a loan “rollover,” which is basically a larger loan with high fees and interest rates. Small consumer loans have longer terms.
3. Single balloon payment: Instead of a reasonable installment plan for repaying loans, the borrower must pay back the entirety of a payday loan at the end of two weeks.
4. Loan flipping: Predatory lenders want to keep borrowers behind in their payments. They earn 90% of their revenue with extensions, rollovers loans or back-to-back transactions. Simply put, you take out a short-term loan. When it is due, you agree to a new loan, with new fees and higher interest rates. When that comes due, you’re offered another new loan, etc.
5. No consideration of borrower’s ability to repay: Banks and other legitimate lenders look at your credit rating and income because they want you to pay them back. Predatory lenders profit from borrowers failing to pay back their loans. That’s why they encourage consumers to borrow the maximum allowed, to create conditions for them to “bail out” the borrower with fresh loans at higher rates.

How to Report Predatory Lenders

The Consumer Financial Protection Board (CFPB) recovered $175 million in monetary relief for veterans and service members through 39 public enforcement acts. Six of those enforcement actions involved violations of the Military Lending Act.

If you believe a lender is violating the MLA, you can file an online complaint with the CFPB. That process takes just 7 to 10 minutes. If that isn’t practical, you can make a report by phone at 855-411-2372.

Alternative Financial Assistance

If mounting credit card debt is the cause of your need for cash, consider the services of a nonprofit credit counseling agency. Their counselors are trained and required to offer financial advice that’s in your best interest. They can assist you with your budget, and provide debt relief programs that can help you out of a financial jam.

Military aid societies, which are often available right on your base or installation, are another great option. They offer free grants or loans at 0% interest.

Try Army Emergency Relief, the Navy-Marine Corps Relief Society, the Air Force Aid Society and Coast Guard Mutual Assistance. The existence of these agencies is all the proof you need that financial worries are nothing to be ashamed of. The American Red Cross offers its Hero Care Center to all military families.

Applying for or receiving aid is not reported to your superiors. It is confidential.