Military Lending Act Has Loopholes Says NY Times Dealbook

Just as I was getting ready to roll out an article agreeing with Creola Johnson and explaining why Congress should implement a 36% cap, like the Military Lending Act, for all of us, the Dealbook rolled out this story.  As it turns out, the Military Lending Act is not stopping payday-style lending to the military after all.

Alarmed that payday lenders were preying on military members, Congress in 2006 passed the law, which was intended to shield servicemen and women from the loans tied to a borrower’s next paycheck. These loans carry double-digit or triple-digit interest rates and plunge customers into debt. Now, seven years since the Military Lending Act came into effect, government authorities say the law has gaps that threaten to leave hundreds of thousands of service members across the country vulnerable to potentially predatory loans — from credit pitched by retailers to pay for electronics or furniture, to auto-title loans to payday-style loans. The law, the authorities say, has not kept pace with high-interest lenders that focus on servicemen and women, both online and near bases.
The short-term loans not covered under the law’s interest rate cap of 36 percent include loans for more than $2,000, loans that last for more than 91 days and auto-title loans with terms longer than 181 days.

Lenders who specialize in ripping off military personnel have official sounding names like Military Financial, Just Military Loans, and Patriot Loans. They like lending to the military because they get paid from the military allotment, which virtually assures payment.  Moreover, soldiers have to stay in good financial shape in order to maintain their security clearance, which means lenders have maximum leverage over their borrowers.  One lenders web site claims “We know the military because we are former military,” Lenders also lure customers by offering $25 Starbucks gift cards for referrals and throw parties with free  food.

Washington is starting to pay attention to all sorts of high-cost ledning, but this in particular. On Wednesday, the Senate Commerce Committee convened a hearing on abusive military lending. And the Defense Department has begun soliciting public feedback on whether the protections of the Military Lending Act should be expanded to include other types of loans.