The Obama administration has offers much-needed improvements to federal rules meant to protect military personnel from abusive loans that trap them in debt and, in certain circumstances, can end their military careers. The changes would repair glaring weaknesses in the rules used to enforce the 2007 Military Loans Act. But the administration and Congress shouldn’t stop there. Millions of civilians are also exposed to loans at ruinous prices. What is needed is a national consumer loan standard – and an interest rate cap – to ensure fair credit across the country.
The Military Loans Act aimed to protect the military from debt traps by applying a 36% interest cap and other consumer protections to a subset of products, including certain types of payday loans. and vehicle title loans. However, open-ended credit, long-term installment loans and some other products do not fall under these rules.
Even after the law was passed, a South Carolina lender gave a serviceman a title loan of $ 1,615 on a 13-year-old car and charged $ 15,613 in interest – an annual rate of 400% – without breaking federal law. The proposed new rules address this and other loopholes by applying the 36% cap to most service member credit products, with a few common sense exemptions.
Troops struggling with excessive debt are a burden on the military. They have morale issues and are more expensive to manage because they need advice and other services. Debt also affects military readiness: Thousands of soldiers have been prevented from serving overseas because the debt they carry is believed to make them a security risk.
The predatory loans that push the military into scarcity are not unique to them, however. Earlier this year, for example, the Federal Bureau of Consumer Financial Protection found that the hidden fees and charges on payday loans were so high that only 15% of borrowers could raise the funds needed to pay off the total debt at time without borrowing again quickly. Almost two-thirds of borrowers have been forced to renew their loans – some more than 10 times – draining their resources and digging them deeper and deeper into financial holes.
The poor and the working class across the country are dragged into poverty and default by deceptively packaged and excessively priced loans. The obvious solution is a national standard for consumer loans. The House and Senate have bills pending that would adopt the 36% standard for all consumer transactions, including those involving payday loans, mortgages, auto loans, credit cards, overdrafts, etc.
Predatory lenders and their congressional surrogates may argue that a national standard is incompatible with free enterprise. In truth, tariff caps were found in the original 13 colonies. In addition, 46 states and the District of Columbia have set interest limits on at least some of the small loans typically offered by payday lenders.
Payday loans expanded dramatically during the 1990s, when many states recklessly exempted lenders from usury limits. Since then, many states have seen the light, but not enough. Ingenious payday lenders have also been successful in evading the strictest state laws by locating elsewhere or using the internet. It is clearly time for a national standard.