Published: August 2006

Predatory lending: Its impact on Armed Forces

The Department of the Defense has released a highly anticipated report on "Predatory Lending Practices Directed at Members of the Armed Forces and Their Dependents," which details the harm done to military personnel and their families by the predatory lending establishments clustered around military bases nationwide.

A Defense Department study sent to Congress yesterday shows that Congress must stop predatory lenders from preying on soldiers, sailors and Air Force personnel. The Pentagon report says payday lenders should charge no more than 36 percent annual percentage rates on their loans to service members, the same cap many states impose in their usury laws in order to ban loansharking. The report said these lenders damage morale and hurt our military preparedness. Click here to download the study.

Payday lenders typically require borrowers to endorse a postdated check and then trap them into rolling the loan over repeatedly at annual percentage rates that can top 400 percent. The average payday borrower pays back $827 on a $339 loan.

Congress asked the Department of Defense to investigate these predatory lenders and how they gouge our service people and hurt the country's preparedness for war. The Department of Defense found that soldiers, sailors and aviators are as many as four times more likely to be victims of payday lenders. These lenders cluster around military bases, the report found.

The report notes that predatory lending in the small loan market is generally considered to include one or more of the following characteristics: High interest rates and fees; little or no responsible underwriting; loan flipping or repeat renewals that ensure profit without significantly paying down principal; loan packing with high cost ancillary products whose cost is not included in computing interest rates; a loan structure or terms that transform these loans into the equivalent of highly secured transactions; fraud or deception; waiver of meaningful legal redress; or operation outside of state usury or small loan protection law or regulation.

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 in 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). Among the findings in the report:

  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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 report notes that service members see the value of limitations on the availability of credit and the cost of obtaining it. When asked by the Consumer Credit Research Foundation whether “government should limit the interest rates that lenders can charge even if it means fewer people will be able to get credit,” 75% of non-payday borrowers and 74% of payday borrowers surveyed said they agreed.

In its conclusions, the DOD notes that it takes seriously the responsibility of the individual Service member to make prudent decisions and to manage personal finances well. "However, predatory lending undermines military readiness, harms the morale of troops and their families, and adds to the cost of fielding an all volunteer fighting force. Education, counseling, assistance from Aid Societies, and sound alternatives are necessary but not sufficient to protect Service members from predatory lending practices or products that are aggressively marketed to consumers in general and to military personnel directly," concludes the report.

For More Information

Center for Responsible Lending

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