The federal Consumer Financial Protection Bureau proposed rules Thursday to crack down on the predatory loan practices of payday lenders that ensnare thousands of service members and their families in spiraling debt.
Under the new rules, "lenders making short-term loans would be required to check upfront whether the borrower can afford to pay the full amount of the payment when it comes due, without needing to re-borrow," said Richard Cordray, the agency's director.
"Specifically, lenders would need to verify the borrower's income, borrowing history, and certain key obligations," Cordray said at a hearing in Kansas City with victims of payday loan rollovers at interest rates that can top 390 percent.
"The proposal further protects against debt traps by making it difficult for lenders to press distressed borrowers into rolling over the same loan or re-borrowing shortly after paying it off," Cordray said.
The proposals by the bureau, set up in 2010 in response to the recession banking scandals, do not need congressional approval and could possibly be implemented next year.
According to the agency, "A payday loan is a short-term loan, often for $500 or less, that is typically due on your next payday. When you take out a payday loan, you typically have to give lenders access to your checking account or write a post-dated check for the full balance that the lender can deposit when the loan is due."
However, Cordray said, "the very economics of the payday lending business model depend on a substantial percentage of borrowers being unable to repay the loan and borrowing again and again at high interest rates, incurring repeated fees as they go along."
For more than a decade, military leaders have been warning against succumbing to the promise of quick cash on what appears to be easy terms offered by storefront payday lenders who set up shop near bases. The troops routinely refer to such operations as "snakeheads," but many still rely on them.
At a subcommittee hearing of the House Appropriations Committee in 2012, Michael Barrett, then the Sergeant Major of the Marine Corps, testified about what the troops might have to do if a threatened government shutdown cut off their pay.
"Marines were addressing the fact that, 'Well, we can always go out in town and see the snakes,' and they were referring to the predatory loan industry, who in some instances have learned how to bypass the law that was put out not too long ago," Barrett said.
Barrett was referring to the Military Lending Act passed by Congress in 2006 that capped interest rates at 36 percent for service members. In 2013, Holly Petraeus, head of the office of servicemembers affairs at the bureau, told the Senate Commerce Committee, "lenders have easily found ways to get outside of the definitions" of the law by adjusting the fine print of the payday loans.
"We've all seen that strip outside the base," Petraeus said, where payday lenders congregate "like bears on a trout stream."
In her annual report earlier this year, Petraeus said complaints to her office from service members, veterans and their families about predatory loan practices continue to rise, going up from 17,000 in 2014 to 19,000 in 2015.
Of increasing concern to the complainants was the fear that "unpaid debts can threaten a military career," Petraeus said. She cited action taken by the CFPB against Security National Automotive Acceptance Company LLC, or SNAAC, an Ohio auto lender.
The firm was accused of "abusive acts or practices" including "threatening to contact service members' commanding officers regarding unpaid debt," and "disclosing service members' debts to commanding officers."
The company was ordered to refund or credit $2.28 million to service members and other consumers who were allegedly harmed and to pay a penalty of $1 million.
In introducing Cordray to the hearing, Kansas City Mayor Sly James, an Independent, said that payday loans were draining an estimated $26 million annually from the city's economy.
"Predatory lending is something we simply have to fix," he said. Kansas City residents were being "caught up in an inescapable debt trap that our state legislature refuses to address," HE said. Interest rates have been "allowed rise to 450 percent and that is astronomically obscene," he said.
In a phone interview, Katie Savant, a government relations issues strategist for the National Military Family Association, said that the group was still studying the proposed CFPB rules changes.
"We want to make sure that military families have access to credit through responsible lenders" but "we don't want them to get involved with something that could lead them into a cycle of debt," she said.
The main trade organization representing the payday loan industry predicted that the rules changes would cost local jobs while cutting off borrowers from needed credit.
"Thousands of lenders, especially small businesses, will be forced to shutter their doors, lay off employees, and leave communities that already have too few options for financial services," Dennis Shaul, chief executive of the Community Financial Services Association of America, said in a statement.
--Richard Sisk can be reached at Richard.Sisk@Military.com.