Service members being hurt by law
President George W. Bush had the best of intentions when he signed the Military Lending Act into law in 2006, capping the fees that banks and other businesses can charge when lending to service members and their spouses. After all, who wants those who have put their lives on the line for this country to be exploited by unfair lending practices? The MLA was supposed to protect them from exploitation, make borrowing more affordable to our service members and their families, and limit the bad actors in lending. It has not worked out as planned.
In fact, borrowing has not become more affordable for military members and their families. The update in 2014, which added further restrictions on military lending, simply compounded the difficulties that service members were facing under the law.
Harris Insights polling has found that between 2014 and 2019, the percentage of military personnel suffering financial distress more than doubled, from 16 percent to 34 percent. The number of military bankruptcies or bankruptcies under consideration, rose from nearly zero to 40,000 between 2014 and 2019, and the number in financial difficulty increased from 40,000 to 200,000.
Only about 63 percent of respondents “paid all their bills on time” in 2019, compared to 83 percent in 2014. Eleven percent have debt in collections in 2019, compared to 3 percent in 2014. Under the MLA, lenders are prohibited from providing service members with some of the most flexible and accommodating forms of alternative credit. As a result, the number of financial services companies operating near military bases and serving military families has dropped. These companies are not vultures — they simply give service members more options, options that are no longer available. This has left many people in “credit deserts,” without the credit upon which they formerly relied.
And this hurts both the service members and the services. A 2017 West Point Military Academy study found some evidence to indicate that having access to a diversity of credit options may decrease “the probability of being involuntarily separated from the Army by 10 percent.” The MLA eliminated that diversity. Without that diversity of options, service members cannot find a workable method to get out of financial trouble, and that leads to adverse consequences for the member and the service. According to the federal government’s National Security Adjudicative Guidelines, excess debt and the inability to repay debts can prevent service members from being deployed:
“Failure to live within one’s means, satisfy debts, and meet financial obligations may indicate poor self-control, lack of judgment, or unwillingness to abide by rules and regulations, all of which can raise questions about an individual’s reliability, trustworthiness, and ability to protect classified or sensitive information. … An individual who is financially overextended is at greater risk of having to engage in illegal or otherwise questionable acts to generate funds.”
Out of necessity, service members have been forced to take alternative measures that aren’t covered by the MLA. A senior military official has been quoted as saying, “Overdraft programs have replaced payday lending as the leading financial problem for military personnel.” Lack of competition from payday lenders leads to abusive practices by other lenders. This same senior official has also said that some financial institutions are now engaged in “predatory or punitive overdraft practices.”
Service members, however, now without options, are forced to accept these practices to avoid adverse consequences to their military career. Congress has created a doubly negative situation — inequality for service members in terms of the policies governing their credit options, and inequality in terms of the outcomes for their financial well-being. Congress cannot, and did not, legislate away the need for credit. Some members of Congress have proposed legislation, HR5050, to extend provisions of the MLA to the Truth and Lending Act, which would affect all borrowers — not just service members and their families. The legislation would pre-empt the consumer credit laws of 43 states, including California, Ohio, Texas, Virginia, and Washington, and put many families’ finances in peril. This is the wrong approach.
Instead of extending the MLA to the Truth in Lending Act, the MLA itself should be reformed — not only to help service members, but also to stop hurting them.