Today, on Fox and Friends, I’m discussing the latest report, released on Monday, from the Consumer Financial Protection Bureau , or CFPB, uncovered lenders who have been taking advantage of loopholes in the Military Lending Act in order to exploit those who serve our country in the military.
As an financial educator to military groups, I speak 100 times a year, educating all branches of the service at special Heroes at Home events in an attempt to help them become financially ready and informing these selfless families about what the scams are and how to avoid them.
Military Lending Act
This was established in 2006 was designed to do basic things:
- Cap credit rates to 36% for active duty military members (or Guard and Reservists on active duty).
- Provide special protections for covered military members and their dependants.
This act is enforced by the CFPB, and other financial regulatory authorizes including the FTC (Federal Trade Commission).
The Military Lending Act is very specific in the ways it protects servicemembers and their spouses. Specifically, the credit regulations are applied as follows:
- Closed end payday loans of $2,000 or less must be capped at 36% APR
- Closed end payday loans that are for 91 days or less are capped at 36% APR
- Auto title loans with terms of 181 days or less are capped at 36% APR
- Closed-end refund or anticipation loans are capped at 36% APR.
Predatory Practice #1: The Bait and Switch
This is also known as “let’s change the name of the loan” from “Payday Loan” to “Deposit Advance Product.” Here’s how it works:
- Make the loan available as a line of credit to those who have a deposit with that lending institution (i.e. a checking account or savings account). With a review of the borrower’s deposit history, they can approve the loan.
- Make it open ended (no specific due date) instead of closed ended (a due date) in order to skirt the 91 day or less rule (see above).
- The CFPB found these types of loans ended up charging an average of 304% APR
- The CFPB report indicated that 22% of Servicemembers who had deposit accounts had at least one of these loans in a 12 month period.
Predatory Practice #2: The Title Loan Shark
The report indicated a servicemember’s spouse in Illinois who took out a title loan of $2575.75 and was charged a $95 lien fee and a finance charge of over $5700 or a 300% APR.
- Make this loan for more than 181 days to skirt the law to avoid the 36% cap.
- Make the loan binding and subject to arbitration and charge 300% APR.
Predatory Practice #3 : The Internet Based Loan
A number of internet-based offshore lenders target servicemembers in a marketing campaign to offer lines of credit. They charge 584% APR and get the lender to sign an agreement that they can debit the borrower’s bank for the minimum payment. One servicemember took out a $1400 line of credit and this is what happened to him:
- The lender made the line of credit for open ended in the repayment plan to avoid the 36% cap.
- In addition to the 584% APR charge fees for each draw on the line of credit he was charged a “transfer fee” and a “credit access fee.”
Avoid Exploitation by Being Informed
Currently, the DOD (Department of Defense) has asked Congress for an expansion of the Military Lending Act legislation that will serve to close some of those loopholes and allow for prosecution of these predatory lendors who charge more than the 36% APR cap.
When in doubt about whether a loan or other financial deal is sound, the servicemember or his family should go to a trusted source that offers true help and won’t take advantage of the situation.
- Family Readiness Centers – Every branch and every base has one of these centers on base. Before you sign any loan paperwork, talk to a free financial counselor who can look over the loan and advise you.
- Non-profit Foundation Support – There are a couple of foundations I like who specialize in military education such as the USAA Foundation where you can get information on how to avoid scams. Then there’s the PenFed Foundation where you can get a $500 loan for only $5 and no interest for a month. This was specifically designed as an alternative to payday loans. There are no additional on fees.
- USAA – In my opinion there’s no other commercial financial institution who does more for military families than USAA. If you need a loan, then they can help. If they determine you don’t qualify for a loan then let this be a red flag to you that your credit-worthiness is so bad that you may soon be declared a security risk due ot financial issues.
- MilitaryOneSource – This is a great place to get connected with a MFLC (Military Family Life Counselor) who can advise you, for free, on financial decisions. They also provide a lot of information on services and goods you may qualify for in order to lighten your financial load.
As the wife of a career fighter pilot and the mom of a Marine, Air Force Pilot and West Point cadet, I know that many military members are at risk to lose their security clearances and be asked to leave the military due to their financial woes.
That is why I’m continuing to bring the Heroes at Home events to a base near you. There are too many legitimate sources out there to help our military members and their families. Tell every military member you know, to read this blog before signing for any financial commitment and to use the free resources they have available to them. We count on our military members and yet, they need to do their part to vet financial decisions in order to stay financially ready.
The final word: When in doubt, DON’T!