The Obama administration has proposed much-needed improvements in federal rules that are supposed to protect service members from predatory loans that trap them in debt and, in certain circumstances, can end their military careers. The changes would repair glaring weaknesses in the rules used to carry out the Military Lending Act of 2007. But the administration and Congress should not stop there. Millions of civilians are also exposed to ruinously priced loans. What is needed is a national consumer lending standard — and interest rate cap — to ensure fair credit in the country as a whole.
The Military Lending Act sought to protect service members from debt traps by applying a 36 percent interest cap and other consumer protections to a subset of products, including certain kinds of payday loans and vehicle title loans. However, open-ended credit, long-term installment loans and some other products fell outside those rules.
Even after the law was passed, a South Carolina lender gave a service member a $1,615 title loan on a 13-year-old car and charged $15,613 in interest — an annual rate of 400 percent — without violating federal law. The new proposed rules close this and other loopholes by applying the 36 percent cap to most credit products aimed at service members, with some common-sense exemptions.
Troops who are saddled with excessive debt are burdensome to the military. They have morale problems and are costlier to manage because they need counseling and other services. Debt also affects military readiness: Thousands of troops have been barred from serving abroad because the debt they carry is thought to make them security risks.
The predatory loans that are pushing service members into penury, however, are not unique to them. Earlier this year, for example, the federal Consumer Financial Protection Bureau found that hidden fees and charges on payday loans were so high that only 15 percent of borrowers could raise the money to repay the total debt on time without quickly borrowing again. Nearly two-thirds of the borrowers were forced to renew their loans — some more than 10 times — depleting their resources and digging them deeper and deeper into financial holes.
Poor and working-class people across the country are being driven into poverty and default by deceptively packaged, usuriously priced loans. The obvious solution is a national standard for consumer lending. Both the House and Senate have bills pending that would adopt the 36 percent standard for all consumer transactions, including those involving payday loans, mortgages, car loans, credit cards, overdraft loans and so on.
Predatory lenders and their surrogates in Congress may claim that a national standard is inconsistent with free enterprise. In truth, rate caps were found in all of the original 13 colonies. Moreover, 46 states and the District of Columbia set interest limits on at least some of the small loans typically offered by payday lenders.
Payday lending expanded significantly during the 1990s, when many states unwisely exempted the lenders from usury caps. Since then, many states have seen the light, but not nearly enough. Resourceful payday lenders have also managed to evade even tough state laws by setting up shop elsewhere or using the Internet. It’s clearly time for a national standard.