Survey: Rate Caps Are Harming Servicemembers
In this month of July, we should remember the role United States servicemembers play in defending and preserving the blessings of freedom for all Americans. The American Financial Services Association (AFSA) is pleased to support Military Consumer Month, an annual July observance that highlights consumer protections and financial readiness for servicemembers, veterans, and their families.
Throughout the month, the Federal Trade Commission (FTC), Department of Defense, and the Consumer Financial Protection Bureau (CFPB) are offering free events focused on empowering servicemembers, veterans, and their families with information and tools to help them navigate their finances. AFSA, via its AFSA Education Foundation, similarly offers free personal finance courses via its MoneySKILL courses.
Helping servicemembers and their families is particularly important given the past year of economic uncertainty and some of the unanticipated financial hardships many are experiencing due to well-intentioned but flawed consumer credit policies.
For example, to protect military personnel from unscrupulous lenders, Congress passed the Military Lending Act (MLA), which imposed a 36 percent annual percentage rate cap on most consumer loans taken out by servicemembers. The cap may have seemed good in theory, but here is where unintended consequences occur.
The Financial Health Network (FHN) estimates that more than a quarter of American consumers do not have “prime” or excellent credit, and to make a break-even loan at a 36 percent all-in APR, the loan would have to be for around $4,000. Most Americans, servicemembers included, are looking to borrow far smaller amounts, perhaps to cover unexpected expenses, and most banks or other lenders cannot lend at a 36 APR given the regulatory costs required to service such a loan.
The result? Fewer loan options. Servicemembers are either forced to take a loan for more money than they want or need, or cannot get reliable credit at all. The recent, nonpartisan National Foundation for Credit Counseling (NFCC) 2020 financial readiness survey of servicemembers found that active duty servicemembers are more than twice as likely to take out a cash advance or payday loan than in 2019:
“Over three-quarters of active duty servicemembers (78 percent) have taken out a loan in the past year…. However, the type of loan has changed dramatically. This year, 31 percent of active duty servicemembers have taken out a cash advance or payday loan, compared to only 13 percent in 2019. This represents an even more dramatic shift since 2014, when just six percent of active duty servicemembers reported taking out such loans. The COVID-19 pandemic may be a contributing factor to increased payday loan usage, as 52 percent reported difficulty finding adequate loan options during the pandemic.” [Emphasis added]
Predatory “payday loans” or “title loans” can place consumers of all stripes – service members included – in very rough financial straits, with exorbitant interest rates, balloon payments, hidden fees, and aggressive business practices.
Traditional installment lenders, on the other hand, offer safe and reliable options for many consumers, particularly those with less than stellar credit. But with a rate cap of 36 percent – as the NFCC survey shows – many traditional installment loans are not available to the folks who need them most.
It is crucial that servicemembers and their families be protected and empowered financially. But it is also important that they have access to the same reliable and sound consumer credit options that other consumers can access. They deserve that peace of mind, and it is the right thing to do.
July 15th, 2021 by Dan Bucherer