WASHINGTON -- While programs are in place to combat predatory lending practices that target service members and their families, better rules and enforcement are needed, witnesses told a Senate Commerce, Science and Transportation Committee Nov. 21.
Predatory lending practices impact not only a service member's financial readiness, but also mission readiness, witnesses told lawmakers in a hearing about the lending practices targeted towards the military.
As a former military spouse and assistant director of the consumer financial protection bureau, office of service member affairs, Holly Petraeus recalled the history and subsequent changes of predatory lending.
"I've lived on or near military bases my entire life, and seen that strip outside the gates, offering everything from furniture to used cars to electronics to jewelry, and the high-cost credit to pay for them," Petraeus said. She said an "alarming increase" occurred in the early 2000s in businesses offering payday loans and corresponding increases in service members taking advantage of "easy money," often without the ability to repay what they borrowed.
"The Pentagon took note that indebtedness was beginning to take a serious toll on military readiness, as did the media," Petraeus added.
The Defense Department, she said, published a report in 2006 on predatory lending practices directed at service members and their families. It found that 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," Petraeus said.
The result was the Military Lending Act of 2006, which caps the rate on consumer credit to a covered member of the armed forces or a dependent of a covered member at 36 percent and creates other consumer protections, she said.
DOD wrote the MLA's regulations and defined "consumer credit" as only three types of loans that were narrowly defined, Petraeus said. They cover payday loans, closed-end loans with terms of 91 days or fewer for $2,000 or less; auto-title loans, closed-end loans with terms of 181 days or fewer; and tax refund anticipation loans which are closed-end credit, she testified.
"For those products that fall within (DOD's) definitions, the law has had a positive impact," she testified. "But the concern now is that lenders have easily found ways to get outside of the definitions."
The spouse of a wounded warrior who took out an auto title loan of $2,575 at an APR of 300 percent was one example Petraeus gave in her testimony.
"The finance charges on the loan were over $5,000. The loan was not subject to the MLA because it was longer than 181 days," she said.
She also acknowledged concerns about the existing rule's effectiveness, which has led to renewed interest from Congress.
"This morning, the bureau announced an enforcement action against a large national payday lender, Cash America, which had made loans in violation of the MLA to hundreds of service members or their dependents," Petraeus testified. "As part of the enforcement action, the lender refunded loan and loan-related fees for a total amount of approximately $33,550. It also put additional compliance mechanisms in place and agreed to increase training on the MLA for its customer service representatives."
She called that action "a great example of what can be achieved through the combined efforts of the bureau's supervisory and enforcement areas," and a significant change in a large payday lender's appreciation of and compliance with the MLA.
Petraeus said she still harbors "real concerns" about the ability of lenders to easily evade the existing MLA regulations.
"The original rule was effective for those products that it covered, but over the past six years, we have seen significant changes in the type of products offered and the contours of state law," she said. "And I think it's critically important to ensure that the MLA protections keep up."
Petraeus said she believes any approach with strict definitions that define individual products will fall victim to the same evasive tactics that are plaguing the existing rule.
"I also believe that from a military financial readiness point of view, it makes no difference whether the loan is made by a depository institution or a non-depository institution, nor does it matter whether the loan is structured and open- or closed-end," she said. "A loan with a sky-high interest rate and burdensome fees has the same adverse impact on military financial readiness no matter who offers it."
The underlying goals of protecting military and financial readiness that led to the MLA are as important today as they were when the act was originally passed, Petraeus said.
"I think we should all be indignant when we hear of service members trapped in outrageous loans and realize that there is little we can do under the current regulations because they are just longer than 91 days or structured as open-end credit," she testified. "We owe it to our service members and their families to do the best possible job of crafting rules that properly implement the intent of the Military Lending Act."
Dwain Alexander, legal assistant attorney at Naval Station Norfolk, Va., said the Navy is taking steps to educate its service members.
"Education will help avoid many debt traps," Alexander testified. "However, some problems like arbitration and the Servicemember Civil Relief Act waiver, and aggressive debt collection, are beyond education."
He said his office is working on videos to educate sailors and families on consumer issues while they're in waiting rooms and similar environments, in addition to providing education to those returning from deployments.
Alexander said other awareness measures to avoid predatory lending being used in the Navy include mandatory military training on payday loans.
However, he said, some issues cannot be addressed such as the service member's waiver and arbitration being in the contracts, because they are legal.
"We need help with that," he said.
