The Department of Defense issued a proposal for a final rule on updates to the Military Lending Act this afternoon.
Use of high-cost financial products has been widespread, even after the passage of the original Military Lending Act. In their response to a recent DoD survey, forty-one percent of enlisted service members (and almost half of those in the junior enlisted ranks) said that they had used a small dollar loan in the previous twelve months. Those products included payday loans, vehicle title loans, bank deposit advances, cash advances on a credit card, overdraft loans or lines of credit, a relief society loan, or a loan from a personal relation.
It is hard to imagine how this kind of problem could have existed in the first place. How could it be that a person could be serving our country in a place like Afghanistan or Iraq, while at the same time attempting to prevent his or her vehicle from being repossessed by a car title lender?
But this kind of thing had been happening. In fact, research completed prior to the original MLA found that predatory lenders were actually drawn to areas around military bases. There were 22 payday lenders in the zip code next to the southern gate of Camp Pendleton Marine Corps bases. There were 18 payday lenders within the 3-mile area surrounding Fort Hood.
To some extent, the original MLA went a long way to reign in these practices. But the high-cost lenders adapted. Through the process of intentionally structuring loan terms so that they fell outside the boundaries of the original Military Lending Act, lenders were still offering high-cost loans to service members. For example, a lender could skirt the MLA's provisions if it originated an installment loan for more than two thousand dollars.
In a 2006 report, the Department linked the financial stability of service members with the overall preparedness of the Armed Services. Almost half of all service members are under 25. Many who enlist do so at a moment when they have little if any degree of financial acumen. Many are also living on the financial edge. To that point, the same DoD study found that almost one-quarter of junior enlisted service members had less than $100 in life savings. But approximately 35 percent had families and one in five said they supported at least one dependent.
The Department of Defense identified these kinds of predatory loans as a concern of our nation's national security. Debt can make a soldier non-deployable. It can be a reason to cancel a security clearance. Equally significant but of a different dynamic are the impacts upon soldiers and their families. Debt can undermine a marriage, put a home at risk, and generally undermine the stability of a household. While a lender might benefit, others pay a high price. The DoD estimates that it costs $57,333 each time a soldier is involuntarily discharged. The costs on a per-discharge basis are even higher when an experienced noncommissioned officer is lost. The Department estimates that this rule will ultimately help the military to save $13 million in costs that it would have otherwise experienced from involuntary discharges related to the loans now prohibited from the updated MLA.
Some might contend that this rule will constrict the availability of credit for active service members. But that is actually a simplification. The truth is that it will constrict the availability of abusive credit, but not to good credit. Military aid societies are one example of an institution with a commitment to provide credit to these individuals. In 2012, five MAS provided $142.2 million in no-interest loans to 159,745 consumers.
The rule will cover new loans beginning on October 1st, 2015.