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Our Indebted Military

posted by Ronald Mann

Payday borrowing by the military has been a hot topic since an August 2006 DoD report estimated that as many as 17% of military personnel use payday loans.  But the spin surrounding this report has missed some troubling points.

First, I do not find it useful to accuse payday lenders of "targeting" military families by responding to demographics.  Military personnel always have been ideal customers for check-cashers.  They have relatively low salaries, and thus are persistently cash-poor.  They are unlikely to be laid off or to have their payroll checks late or dishonored.  So, it should surprise nobody that check-cashing stores, and the payday lending stores that have grown out of them, appear near military bases.  We might just as well say that bars "target" college students because they proliferate near the campuses that house their most profitable customers.  If there is a link between financial distress and payday lending, it affects both civilian and military populations.  And, I haven't seen any evidence that military personnel are more susceptible to cognitive biases than the immigrants and other low-income civilians who routinely use these products.

Second, the report does not acknowledge a more significant disparity between civilian and military personnel -- that the credit reporting system disadvantages those who do not own homes.  Because the credit bureaus collect very little information about non-mortgage expenses, they assign lower credit scores to families that make regular rent and utility payments, but not mortgage payments.  {Some make similar claims about payday transactions, but access to this data would only identify payday loan borrowers as potential customers for other subprime and fringe products.}  Unfortunately, the unstable location of military families makes them more likely to rent and less likely to own than similarly situated civilian families.  So military families as a group will have a harder time gaining access to intermediate and long term credit products.  In general, then, they will be more likely to use short-term products like payday loans.

What can be done?  The FTC's plan to increase the reporting of rent and utility information is a start, but DoD's responses are less useful.  The military would take away the product that the military personnel are using without either addressing the conditions that make the product attractive or facilitating a more reasonably priced alternative.  While a well-designed rollover ban would limit reliance on payday loans for intermediate credit needs, the 36% rate caps will make the national chains inaccessible to military families.  If enacted, we could expect to see those families depending more heavily on subprime credit cards, pawn shops, rent to own providers, and unlicensed payday lenders, all which in the long run will be worse for those families than the prohibited payday loans.

I understand that the military (as a large employer) has a real need to control the spending and borrowing activities of its employees.  But financial distress is not limited to the military.  Congress should view the military as an illustration of a general problem, not as a special case of activity that in other settings is benign.  As Jim Hawkins and I explain in a working paper, the policy issues are complex and deserve thoughtful consideration.

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Comments

Ronald does a nice job of unpacking the implications of the DOD's finding about military personnel using payday loans. His working paper with Jim Hawkins on Payday Loans offers a useful analysis of whether and why we should regulate this product.

I have a couple of arguments about why it may be a good idea to regulate payday lending to the military in particular. First, the military is more than just "a large employer who has a need to control the financial habits of its employees." The costs are much, much higher to society as a whole if service members experience financial distress. Many former miltary commanders have talked about the distractions and stress that financial problems puts on service members, and for everyone's safety, we need these people focused on their jobs. Also, it is my tax dollar that pays these military salaries. That may give the public, and Congress, more reason to monitor and control how they spend that money than someone who works for a private corporation. An identical argument is raised in the context of suggesting a ban on refund anticipation loans for people receiving the Earned Income Tax Credit. Also, there is evidence of "targeting" of military families in a way that I think is more problematic than simply meeting a demand among a cash-poor population. Many of these lenders use military-sounding names, and patriotic type logos, and it is at least possible that this type of advertising, plus the widespread use of former military to endorse these lenders, causes service members to be more trusting and less cautious about whether these transactions make sense for them. I recommend the NCLC's report, In Harms Way, which admittedly is an advocacy-oriented document, for further reading on this subject.

Finally, there is obviously a different solution to this problem, which is to pay military people enough so that they aren't cash-poor. It's a dirty little secret of the military that many enlisted personnel and their families qualify for food stamps or other benefits based on their military pay.

Many millitary personal use payday loan as it is one f the easiest way to get for them and has less risk than any ther loan. Their is a huge number of them having these kind so of loans

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