Seven years after Congress banned payday-loan companies from charging exorbitant interest rates to service members, many of the nation’s military bases are surrounded by storefront lenders who charge high annual percentage rates, sometimes exceeding 400 percent.
The Military Lending Act sought to protect service members and their families from predatory loans. But in practice, the law has defined the types of covered loans so narrowly that it’s been all too easy for lenders to circumvent it.
“We have to revisit this,” said Sen. Dick Durbin, D-Ill., who chairs the defense appropriations subcommittee and is the Senate’s second-ranking Democrat. “If we’re serious about protecting military families from exploitation, this law has to be a lot tighter.”
Members of the military can lose their security clearances for falling into debt. As a result, experts say, service members often avoid taking financial problems to their superior officers and instead resort to high-cost loans they don’t fully understand.
The Department of Defense, which defines which loans the Military Lending Act covers, has begun a process to review the law, said Marcus Beauregard, chief of the Pentagon’s state liaison office.
The act mainly targets two products: payday loans, usually two-week loans with annual percentage rates often above 400 percent, and auto-title loans, typically one-month loans with rates above 100 percent and secured by the borrower’s vehicle. The law caps all covered loans at a 36 percent annual rate.
That limit “did do a great deal of good on the products that it covered,” said Holly Petraeus, the Consumer Financial Protection Bureau’s head of service-member affairs. “But there are a lot of products that it doesn’t cover.”
Representatives from payday and other high-cost lenders said they follow the law. Some defended the proliferation of new products as helpful to indoor Tracking.
In June 2011, Levon Tyler, a 37-year-old staff sergeant in the Marines, walked into Smart Choice Title Loans in Columbia, S.C.; it was the first time he’d ever gone to such a place, he said. But his bills were mounting. He needed cash right away.
Smart Choice agreed to lend him $1,600. In return, Tyler handed over the title to his 1998 Ford SUV and a copy of his keys. Tyler recalled the saleswoman telling him he’d probably be able to pay off the loan in a year. He said he did not scrutinize the contract he signed that day.
If he had, Tyler would have seen that in exchange for that $1,600, he’d agreed to pay a total of $17,228 over two and a half years. The loan’s annual percentage rate, which includes interest and fees, was 400 percent.
Tyler said he provided his military ID when he got the loan. But even with an annual rate as high as a typical payday loan, the Military Lending Act didn’t apply. The law limits the interest rate of title loans — but only those that have a term of six months or less.
In South Carolina, almost no loans fit that definition, said Sue Berkowitz, director of the nonprofit South Carolina Appleseed Legal Justice Center. The reason? Ten years ago, the state legislature passed consumer protections for short-term auto-title loans. In response, lenders simply lengthened the duration of their loans.
Today, plenty of payday and auto-title lenders cluster near Fort Jackson, an army base in Columbia, legally peddling high-cost loans to the more than 36,000 soldiers who receive basic training there each year.
Tyler’s loan showcases other examples of lenders’ ingenuity. Attached to his contract was an addendum that offered a “Summer Fun Program Payoff.” While the loan’s official term was 32 months, putting it outside both South Carolina’s regulations and the Military Lending Act, the “Summer Fun” option allowed Tyler to pay off the loan in a single month. If he did so, he’d pay an annual rate of 110 percent, the addendum said.
Michael Agostinelli, the chief executive of Smart Choice’s parent company, American Life Enterprises, said he wants his customers to pay off their loans early. “They’re meant to be short-term loans,” he said.
He also said that customers who pay on time get “a big discount.” In Tyler’s case, he would have paid an annual rate of 192 percent if he had made all his payments on time.
But Tyler fell behind after only a couple of payments. Less than five months after he took out the loan, a repo company came in the middle of the night to take his car. Three weeks later, it was sold at auction.
The suit names among its plaintiffs three soldiers who took out what appeared to be classic title loans. All agreed to pay an annual rate of around 150 percent for a 30-day loan. All had trouble repaying, according to the suit. One, an Army staff sergeant and Purple Heart recipient, lost his car. The other two managed to pay interest but almost none of the principal on their loans for several months.
The company was fully aware that its customers were soldiers, because they presented their military identifications, said Roy Barnes, a former governor of Georgia who is representing the plaintiffs.
Community Loans, which boasts more than 900 locations nationwide, argued in court that the transactions were not covered by the Military Lending Act because they weren’t loans but sales.
Here’s how Community Loans said the transaction worked: The soldiers sold their vehicles to the company while retaining the option to buy back the cars — for a higher price. In early 2012, the judge rejected that argument. The case is continuing.
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