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Servicemembers Still Lack Access to Credit

Servicemembers Still Lack Access to Credit


In late July, the Department of Defense released its “Access to Financial Institutions on Military Installations” report, which was focused on U.S. Armed Forces servicemembers’ access to traditional financial services:  banks, credit unions and military banking branches.  The report was requested by Congress as part of its consideration of the National Defense Authorization Act of 2022.

Summing up its findings, the Department of Defense’s Comptroller stated:

“The Department has not received any comments from military installation commanders or their respective Military Service Secretaries that Service members do not have adequate access to financial institutions.

“Service members and other personnel that live or work on military installations are free to choose between different financial services providers, including banks, credit unions, and military banking facilities (MBFs) on military installations worldwide.” 

What is more interesting than what is documented in the report is what is not mentioned; the Military Lending Act and its role in the financial health of U.S. military servicemembers. Beyond putting in place some necessary safeguards for our military personnel, particularly those deployed or serving overseas, the MLA imposed a 36% rate cap on most forms of consumer credit products.

The goal of the rate cap was to steer active servicemembers away from predatory payday or other gray market lenders that use high interest rates and hidden fees and early payment penalties to create a cycle of debt many young servicemembers struggle to exit.

But the unintended outcome was denying servicemembers access to sound, responsible small dollar traditional installment loans that provide consumers with access to credit that allows them to cover unexpected costs.  Such loans are regulated, are reported to credit bureaus, and have no hidden fees or early repayment penalties.

In short, while U.S. military personnel may have access to bank and credit unions, they do not have access to a form of credit that may be the only form of credit they could access if they were allowed to.  The result is a U.S. military that is struggling to meet their month-to-month financial needs.

A 2020 Harris Poll of currently active, enlisted members of the U.S. military found that “active duty servicemembers are more than two times as likely to have taken out a cash advance or payday loan in 2020 than in 2019.” Furthermore, “31% of active duty servicemembers have taken out a cash advance or payday loan, compared to only 13 percent in 2019.” These findings should not be ignored.

There is a great deal of data that shows that rate caps like the MLA’s are unworkable for traditional installment small dollar lending below $2500 and hinder consumer choices, particularly because banks and credit unions typically don’t offer loans in such small amounts.

  • The National Commission on Consumer Finance studyconfirmed it;
  • The Consumer Financial Protection Bureau Task Force on Federal Consumer Financial Law reportconfirmed it;
  • A Federal Reserve study on interest rate capsconfirmed that 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 Networkfound that rate caps reduce consumers’ credit options; and,
  • Earlier this year, the Congressional Black Caucus Foundation annual report: highlighted the importance of maintaining a financial marketplace that allows Americans to access small-dollar credit. Most notably, the report cited “proposals to protect consumers from predatory practices through a 36% rate cap would cause more harm than help by limiting consumer access to credit.”

The larger problem for the Department of Defense is that while it has consistently ignored requests for data about the impact on the MLA rate cap on servicemembers, there are independent surveys and CFPB enforcement actions that show the MLA is not working and is harming military servicemembers’ financial health.

  • The National Foundation for Credit Counseling (NFCC) 2020 financial readiness survey of servicemembers, reported:
    • “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 survey indicates that servicemembers and their families are more than twice as likely to take out a cash advance or payday loan in 2020 than in 2019.
    • They said they used these loans because there were few other options available.

Further, the CFPB late last year took enforcement action against a Texas-based pawn/payday lender for violating the terms of the MLA, indicating that the predatory lending industry is able to sidestep DoD policies … or perhaps not.

No one knows because there is no verifiable data that would indicate that the MLA is assisting active military servicemembers and their families or that the MLA is being appropriately and widely enforced.  To date, the Department of Defense has not released any data or research on the success or failure of the MLA, and It has not released data on how the MLA is being monitored or enforced.

So while we applaud the Department of Defense’s report that indicates servicemembers have access to banks and credit unions, we also believe it would be beneficial for DoD to provide a full and transparent review of the impact the MLA is having on the financial health of military servicemembers.

August 26th, 2022 by

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