Military payday lending restrictions are filled with loopholes that are allowing servicemembers to get into financial trouble, the Consumer Financial Protection Bureau reported Monday.
The CFPB, the government’s consumer finance watchdog, released a new study documenting the reliance of military personnel on short-term, high-cost borrowing, and some instances in which lenders reaped massive profits from them.
In one case, a lender in California gave a servicemember a $2,000 installment loan with an annual percentage rate of 219.12 percent, for which he or she ended up paying $3,966.84 over 12 months.
In another instance, an Illinois company give a military spouse a $2,575 auto title loan with an APR of 300 percent that ended up costing the spouse $5,720 over the year.
Some kinds of payday lending to members of the military are banned under the Military Lending Act, but CFPB Director Richard Cordray said that loopholes in the restrictions allow for widespread abuse.
“The current rules under the Military Lending Act are akin to sending a soldier into battle with a flak jacket but no helmet. To give our troops full-cover protection, the rules need to be expanded,” Cordray said.
Lenders can get around the restrictions by issuing long-term payday or auto title loans, or by giving members of the military open-ended lines of credit.
The Department of Defense has proposed broadening the rule to include all payday and auto title loans, as well as open-ended credit. The CFPB included its report in a comment urging that the proposal be adopted.
The CFPB found that soldiers and sailors are more likely than the general populace to turn to non-traditional forms of financing such as payday lending. Twenty-two percent of the military took out an advance on a deposit, compared with just 16 percent of the U.S. population.
Members of the military paid about $5 million on $50 million of those advances over a year, the study found, often at interest rates exceeding 300 percent annually.
