> Posted by Lindsey Tiers, Communications and Operations, the Smart Campaign
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According to a recent article in The New York Times, a number of lenders seem to have adapted General Douglas MacArthur’s views on government regulation: “Rules are mostly made to be broken.” Research conducted on the effectiveness of the U.S. government’s Military Lending Act over the past few years has illustrated that “lenders, intent on offering loans regardless of the federal restrictions, devised loan products that fell squarely outside the loan’s restrictions.” When interest rate caps were limited to loans of up to $2,000, lenders started offering loans for $2,001. When protections were applied to auto-title loans with terms under 181 days, loan periods were extended to just over 181 days.
The Obama Administration is suggesting an expansion of the law in order to close some of the loopholes, but will more rules truly deter predatory lenders? Regulators might find themselves overburdened with a multitude of rules and a decreasing ability to enforce them. A few well-supervised regulations seem preferable to a tangled web of unenforceable ones. Additionally, it would be foolish to underestimate the innovative abilities of those intent on making a buck from those in the military, based on the case precedents we’ve seen.
Even when the law does actually catch up to bad actors, there is evidence that they can go out again with the same or similar practices. Julio Estrada, a used-car dealer featured in an earlier article in The New York Times on subprime auto lending, continued to dupe customers into accepting predatory loans for several months after he was “indicted by the Queens district attorney on grand larceny charges that he defrauded more than 23 car buyers with refinancing schemes” less than a year earlier.
Predatory lending to military personnel is made easy because military salaries are largely transparent. Lenders have near perfect knowledge of just how much a servicemember desperate for cash can afford in monthly payments. The reliability of a government paycheck has fostered the creation of systems that withdraw installments before income even reaches a servicemember’s account, further minimizing the risk to lenders and increasing their relative advantage. Yet the most egregious imbalance in knowledge stems from the fact that lenders know the “military considers personal indebtedness to be a threat to national security, so high levels of debt can imperil service members’ security clearances,” and ultimately their job. Predatory lenders leverage this knowledge to threaten servicemembers.
Perhaps instead of relying on regulation, and hoping that everyone plays by the rules, we should refocus our efforts on adequately arming our servicemen and women with the knowledge they need to defend themselves. The Consumer Financial Protection Bureau (CFPB) took steps to do just that when it created the Office of Servicemember Affairs to focus on the challenges faced by military employees. However, it primarily addresses ways to save, funding for higher education, and accessing VA benefits, and only touches on indebtedness in a section on deployment and credit cards. While educating servicemembers on these issues is important, increasing savings and controlling the interest charged on credit card bills are ways to preempt debt, and might not necessarily be relevant for someone already in debt. These individuals are most likely to fall prey to abusive payday lending schemes.
Additionally, many of the resources that servicemembers are directed to by the site are organizations within the military. The page on “Planning for your future” lists reaching out the Personal Financial Management Program in the military support center as a first step. It suggests receiving financial counseling through Military OneSource, a Department of Defense-funded initiative. Its website offers “Confidential Help”, but financial counseling seems to be one of the few forms of mentoring that falls outside this designation. In response to the published query, “I believe that my rights as a servicemember have been violated by my credit card issuer. What should I do?” the CFPB recommends contacting the Armed Forces Legal Assistance Program. If excessive indebtedness can cause a servicemember to be discharged or demoted, is it reasonable to expect military personnel will feel comfortable utilizing these channels?
Even more promising are steps to expand and improve the current financial education programs implemented by the armed forces. Research done by the Federal Reserve Board and the Department of Defense on financial education programs in the military found that soldiers given a two-day financial education course were more likely than their counterparts in the control group to exhibit more positive financial behaviors and less negative behaviors. Currently, some form of financial literacy education is mandatory for all incoming personnel in every branch of the military. According to a CFPB white paper, senior military leaders agreed on the importance of increased “technology, such as mobile applications and gaming, to create interactive ‘financial life tools’ that servicemembers can use to learn financial lessons and process financial decisions,” instead of the “death by PowerPoint” pedagogy currently in place. As with any education initiative, the effectiveness of these initiatives will not be clear until more time has passed and more research can be done. However, it seems likely that investing more heavily in building up the knowledge that will tip the scales towards consumers will prove more effective than chasing elusive, shape-shifting lenders determined to break the rules.
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