The Pentagon is up in arms over abusive lending tactics used against military personnel and their families as a growing number of excessively high-cost loans with financially burdensome terms reduce morale, ruin military careers and destroy families.
Like loan sharks employing military-like strategy and precision, lending services deploy in perimeters fronting military bases, exploit financial weaknesses and repeatedly attack weakened targets.
Mandated by Section 579 of the "National Defense Authorization Act for Fiscal Year 2006", the U.S. Department of the Defense's (DOD) "Report on Predatory Lending Practices Directed at Members of the Armed Forces and Their Dependents" issued to Congress on August 10, does not discuss home loans, but it is relevant to home ownership.
The study examines what could be considered the improvised explosive devices (IEDs) of predatory lending -- predatory payday lending, Internet lending, car title lending, installment loans, refund-anticipation loans and rent-to-own contracts.
While predatory mortgage lending can take away home ownership, the unimprovised lending devices of short-term predatory lending can send borrowers retreating from advances on home ownership. Indebtedness, bankruptcy and marred credit reports resulting from abusive short-term predatory lending can increase the cost of buying a home or prevent home ownership altogether.
However, all predatory lending has many common characteristics.
The report says the predatory products it studied feature easy-access, high fees and or high interest rates, balloon payments, excessive charges and other tactics to obfuscate the comparative cost of their product with other options that might be available to the borrower. So does predatory mortgage lending.
Lenders also make short-term loans based on lenders' access to assets and guaranteed continued income, to assure lenders' access to repayment funds, without regard to the borrowers' real ability to repay the loan. Predatory mortgage lending often banks on nabbing what's likely a household's greatest asset -- the property.
The study says, based on a variety of sources, which uses a variety of reporting methods, the number of military families using the short-term predatory lending products ranges from 10 percent to as many as one in five, 20 percent, but it also reveals that military families handle credit much better now than just three years ago, thanks, in part, to the military's own programs for financial readiness, including "Save and Invest".
However, the Pentagon remains on high alert because, the report says, "Predatory lending undermines military readiness, harms the morale of troops and their families, and adds to the cost of fielding an all volunteer fighting force ... . Financial issues account for 80 percent of security clearance revocations and denials for Navy personnel."
The report says troops and the families are prime targets because many of them are young and financially inexperienced borrowers. That makes them less likely to weigh the predatory loan against other opportunities and less likely to consider the consequences of taking the loan.
The report also says predatory lending services are "ubiquitous" around military installations and spreading via the Internet.
Rather than considering the borrower's real ability to repay the loan, predators take advantage of borrower's inability to pay the loan in full when due so they can encourage extensions through refinancing and loan flipping that come with additional high fees and little or no payment of principal.
The Pentagon also charges that predatory lenders scheme to circumvent existing laws.
In some of the worst cases, among 3,000 case studies involving active duty military personnel the Pentagon said:
- A U.S. Navy E-5 (Petty Officer, Second Class) began with three payday loans in March 2004 to take his family to visit his grandfather sick with cancer. By October 2005, he had four payday loans, totaling $2,300 costing him $600 every month just in rollover fees.
- An Air Force E-4 (Senior Airman) had payday loans with two lenders, totaling $900 owed in principal. She paid $200 in fees each month to rollover the loans for seven months. When she entered financial counseling, she had other military installment loans, one for $7,000 with a 61 percent APR.
- A U.S. Air Force E-4 obtained a $500 loan that ballooned into a $10,000 loan with an annual percentage rate (APR) of 50 percent. The woman ended up paying $15,000 for the money and much more in a personal loss after the financial problems contributed to her divorce.
The Pentagon's report also asks for federal intervention that recommends at 36-percent cap on APRs, nearly double the level of credit cards and four times that of a home equity loan. But the cap would include all extra fees, charges and products like credit insurance premiums -- the latter of which is a service of questionable value.
In addition to the cap, the Pentagon is asking for other regulations including, among others, prohibitions on:
- Loans made without consideration of ability to repay.
- Loans secured by personal checks or car titles.
- Waiving legal rights to go to court.
- Waiving financial protections afforded by the Servicemembers Civil Relief Act .
