Ed's Blog

SECOND UPDATE: 30 April: Update, Thursday 4/30: Predatory lenders defeated, troops protected, for now!
Here's Representative Duckworth's release on her bi-partisan 32-30 victory in protecting the Military Lending Act at 4:30 AM this morning. As we note in our own release: "We expect further attacks on the Department of Defense's important new rules, on the House floor and in the Senate, but are prepared to stand alongside Rep. Duckworth and Senator Jack Reed (RI) and others who are working to "protect our troops," while others who may often say "support our troops" are working against them."

UPDATE 29 April: The House Armed Services Committee has begun the committee voting (markup) process (watch a livestream). W understand that a vote on the PIRG-backed Tammy Duckworth (IL) amendment to strike the offensive language delaying new servicemember protections from high-cost loans may not occur until late this afternoon or even tonight. Jack Reed (RI), Senate Armed Services Committee ranking member and a veteran, has issued this statement opposing delay.

ORIGINAL POST: Last year the Department of Defense proposed needed improvements to the 2007 Military Lending Act, in response to growing concerns that payday and other high-cost lenders were making loans to servicemembers at 400% APR or more, by exploiting loopholes to evade the law's 36% APR cap. The Pentagon argued that the loopholes posed ongoing harms to both military families and unit preparedness. Why unit preparedness? When servicemembers default on loans, bad credit reports result in security clearances being revoked. The Pentagon found that the problem was big enough to harm unit preparedness since signifincant numbers of servicemembers were being prevented from deployment on ships or overseas, which requires a security clearance. The Pentagon also found that unit morale suffered from the harsh effects of predatory lending.

The bi-partisan Military Lending Act of 2007 passed after two major efforts. First, for years the Pentagon had allowed active-duty military commanders at bases around the country to join military assistance organizations, faith, civil rights and consumer leaders in supporting state action to rein in high-cost lending. As one Marine general told a San Diego community group in 2006:

"With our Navy partners we are going after Pay Day Lenders. Pay Day Lenders are the parasites found outside of our military bases in Southern California who prey on young Marines and Sailors because the lenders know they are uninformed consumers." --Maj. Gen. Mike Lehnert, commander of Marine Corps Bases (West).

Then, a comprehensive Pentagon predatory lending study confirmed the need for federal action. The 2007 Military Lending Act capped payday and other loan rates to military families at 36% APR. But lenders re-designed their loans to evade the caps. Predatory lending continued. In 2014, the Department of Defense proposed a comprehensive new rule designed to capture all forms of predatory lending and ban certain practices, such as pre-dispute arbitration clauses, in loans to servicemembers. The National Military Family Association explained the importance of the changes:

"The chargeable interest rates for these types of loans were capped at 36 percent, reducing rollovers on the debt that often resulted in triple-digit interest rates. It was a good start. But because of the narrow scope of the Act, many types of predatory loans weren’t included—so small loans were putting military families into extraordinary debt."

Now, Section 594 of the Chairman's Mark of the National Defense Authorization Act, HR 1735 (very large pdf) would delay the Department of Defense's regulations improving the law and closing loopholes. The rule would be delayed by up to a year or more. The bill is scheduled for committee votes (markup) on Wednesday, April 29. A House vote is anticipated in mid-May. Rep. Tammy Duckworth (IL), a veteran, is expected to offer a PIRG-backed amendment to strike the redundant provision (the Pentagon has already conducted numerous studies required before proposing the regulation). In testimony to the Senate Veterans' Affairs Committee in 2013, Colonel Paul Kantwill, Director of Legal Policy, Office of the Undersecretary for Personnel and Readiness, Department of Defense, stated:

"I will discuss other financial challenges confronting Servicemembers, veterans, and their families in today’s consumer marketplace. These challenges are many and varied, but I will focus primarily on issues and challenges that fall within or around the Military Lending Act (MLA)--small dollar, payday-type lending services and products--as the Department sees this as the biggest, current financial challenge facing our Servicemembers, Veterans, and their families."

Following that testimony, the Pentagon issued a 2014 report calling for changes to the Military Lending Act. That report found the following:

"Losing qualified Service members due to personal issues, such as financial instability, causes loss of mission capability and drives significant replacement costs.  The Department estimates that each separation costs the Department $57,333. Losing an experienced mid-grade noncommissioned officer (NCO) , who may be in a leadership position or key technical position, may be considerably more expensive in terms of replacement costs and in terms of the degradation of mission effectiveness resulting from a loss of personal reliability for deployment and availability for duty.  A study of the potential impact of the use of payday loans on enlisted members in the Air Force found “significant average declines in overall job performance and retention, and significant increases in severely poor readiness,” as a result of using payday loans. Additionally, financial concerns detract from mission focus and often times require attention from commanding officers and senior NCOs to resolve outstanding debts and other credit issues."

Subsequently, the Department of Defense, led by then-Secretary Chuck Hagel, proposed comprehensive changes to the MLA's implementing regulation designed to protect servicemembers and unit preparedness. This Americans for Financial Reform webpage includes a variety of materials supporting the changes, as well as a link to the proposed rule and a summary of the rule.

As the Consumer Financial Protection Bureau (CFPB) Assistant Director for Servicemember Affairs Holly Petraeus explained last fall:

“I commend Secretary Hagel for taking this important step to make the Military Lending Act more effective. High-interest loans to the military have been a problem for many years. This problem reached a crisis as payday and other lenders began thronging outside the gates of military installations in ever-increasing numbers. In 2006, Congress acted against this threat to military financial and operational readiness by passing the Military Lending Act. This law was designed to protect active-duty servicemembers and their families from high-cost loans by capping rates at 36 percent. Unfortunately, less than a decade after that law was passed, those who would profit by charging exorbitant rates to the military have found it all too easy to evade the original intention of the Military Lending Act. Taking advantage of loopholes, lenders have continued to charge military families annual percentage rates as high as 500 percent.”

Predatory lenders laid siege to our military bases, surrounding them with flashy storefronts targeting young soldiers and their families for high-cost loans, including payday, auto title and other high-cost loans. Congress acted, but more needs to be done. Now, they have laid siege to the Congress, asking it to delay additional protections against their unfair practices while needless, redundant studies are prepared. Exhaustive studies have already been done. Proposed regulations have been thoroughly vetted. Only in Washington would some politicians even consider a calculus that places the demands of special interests above the compelling needs of both the nation's military preparedness and the well-being of the nation's defenders themselves.

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