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Iraq Payday

posted by Elizabeth Warren

President Bush announced this morning that he is recalling 2,500 Marines to active duty, and more recalls may be on the way in the next few months.  "Recall" in this context means that men and women who have completed the agreed term of their active service and who are now civilians with jobs, families, mortgages, credit card bills, car loans and, as Zorba said, the "whole catastrophe" will pick up stakes and head back to Iraq. 

So what do their families do?  What if they made financial commitments based on new jobs that pay better?  What if their families need to move to wait out the deployment?  What if they can't make it on a marine's pay? 

Katie Porter just posted about the recently released report from the Department of Defense that tells what the market solution has been:  some of these families will turn to the payday lenders that surround the military bases.  And some of these families will seal their financial doom when they do so.  The DoD has weighed in, asking Congress to rein in the payday lenders, explaining that the practices of payday lenders hurt our troops. 

I note the deployment here to make a point:  it's all connected.  There are no credit issues in a vacuum.  Lenders ring military bases because military families are vulnerable.  As we push our troops harder to fight a war in Iraq, their families become more vulnerable.  And as their vulnerability increases, the payday lenders and other predators close in tighter.

I cannot think of an issue that affects American families that does not also connect to a credit issue.  And I cannot think of a credit issue that does not affect an American family.  Iraq and payday lending are just one more reminder.


Elizabeth's post prompts me to highlight something abou the pending military lending bill that I've received off-blog quesitons about: "Why is a 36 percent cap for credit a positive development? This seems like an outrageous amount."

The key here is that the cap would apply to "all extensions of credit." So while a 36 percent APR seems ridiculous for a mortgage (and to some people for a credit card, although these subprime cards are definitely out there), the typical APR on payday loans, car title loans, refund anticipation loans, etc. are in the range of 200% to 1,000% as APRs.

Military families' use of these high-yield lending products is widespread. The DOD reports shows that 1 in 5 enlisted military people had taken out a payday loan in the previuos year. Since we all foot the bill for military salaries, it's our collective money paying these interest rates. This same argument can be made about why tax refund anticipation loans should be banned. The typical user is someone who is receiving the Earned Income Tax Credit, a sizeable chunk of which goes to the tax preparation company rather than individual.

As a military officer (much of my active duty time as a commanding officer) before law school, all I can say is that Ms Warren's and Ms Porter's posts understate the reality of the problems facing military personnel.

Aside: One insidious aspect of the credit-evaluation system that directly impacts military personnel is its continued reliance on "stable residential address" as a significant factor in assigning credit scores. For example, I had an "unstable" address for the entire first year I was on active duty, having had five residences in that year. That haunted my credit report for a decade. I have no statistical basis for saying that this influences the bankruptcy system, primarily because anyone in my career areas who came even close to bankruptcy lost his/her security clearance and got quietly reassigned. That said, though...

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