Revisit Military Lending Act, provide access to credit
By DON LOREN, AL ZAPANTA AND FRANK YOAKUM | Special to Stars and Stripes | Published: February 14, 2020
While the economy thrives, many Americans struggle with slow income growth, high debt and little to no savings. Unable to meet spiking health care and housing costs, a catastrophic $400 emergency expense can ruin them.
Military families, especially junior enlisted making only $27,000 per year, face even more unique financial challenges. In fact, a recent HarrisX poll found more than three quarters of all military families live paycheck to paycheck.
Compare that to nonmilitary low-income families, who have a 15% lower rate of living paycheck to paycheck. Across the board, military families have more financial problems than their civilian counterparts. Compared to civilian counterparts, when experiencing an unexpected $400 expense, military families are:
Three times more likely to pay bills late.
Three times more likely to pawn a valuable item.
Four times more likely to overdraw their bank accounts.
Almost five times more likely to ask for a pay advance.
Five times more likely to take out a vehicle title loan.
Military families have more debt than their civilian counterparts, are five times more likely to use a short-term loan, and almost 60% of all military families used some type of short-term loan product, versus only 24% of their civilian counterparts. But because of poorly drafted laws and regulations, military families can’t get the credit they need, making these financial problems worse.
In 2006, Congress passed the Military Lending Act prohibiting loans to active-duty military or their family with an interest rate greater than 36%. In 2015, the Department of Defense issued regulations to extend MLA prohibitions to all nonmortgage credit, and levy substantial penalties if lenders don’t wade through the DOD’s personnel databases to make sure anyone applying is not in the military. This puts more military families in financial distress, with more debt, and less access to needed credit.
Harris Insights polling found that, between 2014 and 2019, the percentage of military personnel suffering financial distress more than doubled, from 16% to 34%. The number of military bankruptcies, or those seriously considering it, rose from essentially zero to 40,000 between 2014 and 2019, and the number in active financial difficulties ballooned from 40,000 to more than 200,000.
By denying easy access credit to military families, the Military Lending Act forces military families to use more damaging and permanently scarring options of not paying bills on time, bouncing checks, or even going to foreign online lenders who don’t follow laws, and with whom military families have no protection.
In fact, the recent HarrisX poll found 51% of all military families had been denied credit specifically because of the Military Lending Act. Lower-income military personnel are left with few options.
Placing the arbitrary 36% interest rate cap did not improve the financial wellbeing of military men and women. Instead, it did substantial damage. A 2017 West Point Military Academy study found no evidence “of any adverse effects of payday lending access on credit and labor outcomes,” and some evidence indicates that having access to payday loans may decrease “the probability of being involuntary separated from the Army by 10 percent.”
Lack of access to credit follows military personnel once they are discharged as well. Both the Federal Reserve Bank of New York and Syracuse University’s Institute of Veterans and Military Families found veterans more likely to be deemed higher credit risks, and are “30% more likely to be turned down for a request made for credit than nonveterans.”
On Feb. 5, The House Financial Services Committee considered HR 5050, the Veterans and Consumers Fair Credit Act — a misleading title because there is not a single specific provision for veterans. While it references the Military Lending Act, it only exports the 36% interest rate cap from military borrowers to the entire nation. A more robust analysis of the Military Lending Act is needed, and legislation that helps low-pay service members afford to live in high-priced military locations is as well. Veteran service organizations such as AMVETS, the Military Order of the Purple Heart, the Enlisted Association of the National Guard of the United States and Hispanic War Veterans told House Financial Services Committee Chairwoman Maxine Waters of the potential damage from this proposed legislation.
We must develop real solutions for military and veteran access to credit, and the ability for them to provide adequate financial care of their families. We stand ready to do so, but HR 5050 will only make matters worse.
Don Loren, a retired Navy rear admiral, is a former deputy assistant secretary of defense and assistant secretary of veterans affairs. Al Zapanta, a retired Army brigadier general, is a former assistant secretary of interior, and president and CEO of the Mexican-American Chamber of Commerce. Frank Yoakum, a retired Army sergeant major, is executive director of the Enlisted Association of the National Guard of the United States. The authors wrote this column with guidance from the Online Lenders Alliance. Military rank and organizations named are only for identification, and no endorsement by the Department of Defense or any other organizations is implied.