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DoD is Misinformed on Rate Caps

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DoD is Misinformed on Rate Caps

The recent 2021 “Report on the Military Lending Act and the Effects of High Interest Rates on Readiness” is public and makes the following statement:

“The [Military Lending Act and Military Annual Percentage Rate] support Service members and families by ensuring they are not subject to unfair credit practices that can negatively impact financial readiness and, in turn military readiness. The MAPR places a reasonable limit with a long regulatory history on the cost of credit that prevents covered borrowers from becoming trapped in a harmful cycle of debt resulting from egregious interest rates.”

This statement flies in the face of data and independent reports released over the past year – some about active military servicemembers – that confirms the severe harm that rate caps impose, particularly on the very men and women the Pentagon claims to support. While authors of the “study” references surveys, they don’t cite any of them, perhaps because the surveys undercut the Pentagon’s predetermined outcome.

So let’s look at what recent studies have actually reported.  For example, the National Foundation for Credit Counseling (NFCC) 2020 financial readiness survey of servicemembers, reported this:

“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.

More than 31% of active military personnel took out loans via predatory lenders that the Pentagon seems wholly unaware of.  One would think that in a serious study that considers the financial health of its target audience and the efficacy of rate caps, the Department of Defense would highlight such a troubling trend. One reason cited by military personnel for turning to predatory lenders? The lack of access to other credit products. This tracks with other research by other federal agencies.

The Federal Reserve, the Consumer Financial Protection Bureau’s own taskforce, banks, non-bank lenders and credit unions all say the same thing: Interest rate caps at 36% or below are unworkable and harm the people these arbitrary caps are intended to protect.

  • The National Commission on Consumer Finance study confirmed it.
  • The Consumer Financial Protection Bureau Task Force on Federal Consumer Financial Law report confirmed it.
  • A Federal Reserve study on interest rate caps confirmed that reputable lenders cannot afford to offer a small dollar loan capped at 36% interest without taking a loss. The costs involved for such loans require a minimum of loan amount of about $2500, when most consumers are looking for loan amounts considerably less than that.

The Financial Health Network found that arbitrary rate caps are harmful to consumers, particularly those with neither the savings nor credit to draw upon and reduce credit options for those consumers to access:

  • (FHN) estimates that more than a quarter of American consumers do not have “prime” or excellent credit. When the reputable lenders stop offering consumer credit products – particularly to customers with less than perfect credit, or who are under-banked or unbanked – those consumers are left with few options other than the grey market predatory lenders policymakers claim to want to take out of the market.

Yet in the face of all of this – and without ever releasing a scintilla of hard data on what we now know from the 2020 NFCC financial readiness survey is the devastating financial impact the Military Lending Act’s 36% rate cap has had on active servicemembers – the Pentagon has released a report that seems unmoored from reality.

Given that the Department of Defense has refused to release data on the effect of its 36% MAPR, the statements of this recent document ring hollow. It is time for the Department of Defense to stop stalling: release the data it has on effects its 36% rate cap has had on the military and suspend any plans or proposals that might further financially harm America’s active servicemembers who defend our nation every day.

July 22nd, 2021 by