Support Our Troops (Against Payday Lenders)

Some congressional Republicans are trying to block new Defense Department regulations designed to protect our troops from abusive payday lenders. They shouldn’t.

Hill Democrats, with whom I rarely agree on anything, are right on this one. Most of my fellow Republicans are wrong.

It’s a matter of military readiness. The proposed rules would tighten enforcement of the Military Lending Act, a law that bars lenders from charging excessive interest rates on small-dollar loans to unsuspecting U.S. service members and their families.

The banking lobby opposes the rules. Republicans should support the troops and let the rules take effect.

I’m always skeptical of new government regulation, and especially of laws that purport to protect people from their own poor choices. But this regulation is easy to support. Congress has the power to – and should – drive usurers away from our military installations, because such lenders pose a risk to the national defense.

Investigations by the Pentagon and the federal Consumer Financial Protection Bureau reveal stories of service families being charged 300 percent, 400 percent or more for small-dollar, short-term loans. Some borrowers pay more than twice the original loan amount due to hidden or poorly understood interest and fees. I doubt that helps morale. Examples from the CFPB’s report:

• [O]ne lender in Illinois … set up a 12-month contract term for an auto title loan for a servicemember’s spouse … charging an APR [annual percentage rate] of 300 percent. In the end, the servicemember’s spouse spent $5,720.24 to borrow just $2,575.
• [A]n Internet-based lender located offshore … lent to a servicemember in Delaware. Because the loan was structured as an open-end line of credit, [existing] rules did not prohibit the lender from charging an APR of 584 percent.

In 2003, U.S. military leaders coined the term “financial readiness” to describe a problem than can negatively affect military readiness. Soldiers who are struggling to make ends meet can’t be counted on to remain mission-focused. Bankrupted or debt-ridden servicemen are more likely to leave the service altogether, wasting manpower and weakening the military. So DOD has made a priority of inculcating financial skills in the ranks, and erecting legal barriers against financial predators.

One such barrier is the Military Lending Act, which was authored in 2006 by Senators Jim Talent, R-Mo., and Bill Nelson, D-Fla., and Representative Sam Graves, R-Mo., and signed into law by President George W. Bush. The act caps annual interest rates for consumer credit to military borrowers at 36 percent, including all fees and charges, credit insurance premiums and other ancillary charges. It’s narrowly tailored, covering only active-duty troops and their dependents and only loans designed for personal, family or household purposes, as opposed to, for example, mortgages or vehicle purchase loans.

DOD regulations issued in 2007 prohibit three kinds of loans: payday loans below $2,000 for terms of 91 days or fewer; vehicle title loans for terms of 181 days or fewer; and tax refund anticipation loans.

The act has worked. Predatory lending to service members has declined. But that hasn’t stopped enterprising creditors from circumventing the law by, for example, making the loan amount $2,001 instead of $2,000, or for 92 days instead of 91.

Banking interests have been lobbying Congress to kill the new rules, decrying them as unneeded, over broad and unworkable. The rules would expand coverage to credit cards and most lenders, including traditional banks and credit unions. Banking associations say that goes too far and could cause credit for military families to dry up. The department, they say, should raise the current dollar and repayment-period thresholds in order to capture more unsavory loans, and leave respectable lenders untouched.

There may be a case for higher thresholds, but it’s hard to see a justification for exempting whole classes of lenders (bankers, credit unions), or whole classes of financial products (credit cards) from a usury law.

GOP leaders added a provision to this year’s defense authorization bill requiring that DOD postpone implementation and conduct another study on the issue instead. The Pentagon has already issued two studies so far, in 2006 and 2014, and the CFPB also reported on the issue in 2012, 2013 and 2014. The provision would delay the rules until after the 2016 elections, when a new president could presumably withdraw them. 

On April 30, the House Armed Services Committee narrowly voted to strip the provision, at the urging of Representative Tammy Duckworth, an Illinois Democrat and injured Iraq War veteran, The vote was 32-30. Five Republicans crossed the aisle to join 27 Democrats in sustaining the regs. Among them was Representative Steve Russell, an Oklahoma Republican and leader of the Army unit that captured Saddam Hussein.

Would military families really lose access to small-dollar loans? Doubtful. Such loans would still be legal, and lucrative. More likely, what families will lose is some benefits of choice and innovation. After all, anti-usury laws, like any form of price control, will have some negative side-effects. But on the other hand, these rules will protect vulnerable families from 300 percent interest rates.

My fellow Republicans: Let the payday rule go forward. Support our troops against usurers.

P.S. Also give them a pay raise. They’ll be less likely to get into debt.