How to Protect Yourself from Predatory Lenders

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The Bottom Line - Payday loans can be a debt-trap for military service members, with many predatory lenders located near military bases. Federal regulations have tried to curtail the practice with mixed success. All military personnel should know their rights and be able to spot predatory lending practices to avoid being made a victim.

Short-term Money Needs

Finances for many of us are a month-to-month struggle. Deployments, relocations and more can make this situation much worse for military families. Even by cutting corners, buying only necessities, and carefully budgeting income and expenses, many households are just one emergency or expense away from a financial crisis.

Payday loans can be a quick solution to this need for short-term financial assistance. Many families around the country lean on them as a stopgap between paychecks. However, the high fees and structure of these loans can turn them into a debt treadmill. One loan often turns into multiple rollovers, and you find yourself paying hundreds or thousands of dollars more than expected. In the end, they are often a more serious problem than the one they were meant to solve.

Military Lending Act

Congress passed the Military Lending Act (MLA), in 2007, to protect servicemembers and their families. Active-duty personnel, active National Guard and Reserves, and their dependents were supposed to be shielded from predatory lending practices.

However, the new law did not go far enough and many lenders exploited loopholes to continue trapping military family members into paying high interest on loans. "We have to revisit this," said Sen. Dick Durbin, D-Ill., chairman of the defense appropriations subcommittee. "If we're serious about protecting military families from exploitation, this law has to be a lot tighter."

CFPB - New Policeman on the Beat

The MLA was amended in 2012, strengthening its protections and empowering the Consumer Financial Protection Bureau (CFPB) to police lenders, ensuring that they adhere to the MLA requirements.

"Protecting servicemembers is a priority for the CFPB," said CFPB Director Richard Cordray. "We will use the authority Congress gave us to enforce the Military Lending Act and to safeguard our men and women in uniform from illegal payday loans."

If you are active-duty, active-reservist or a direct family member then you are covered by the MLA. Here are some specific protections in the law that you should know about:

  1. Lenders cannot charge more than 36% interest-The law offers military servicemembers stronger protections that the average consumer. Forloans less than $2,000 that are to be repaid in less than 91 days, a lender cannot charge more than 36%, including interest and fees. Standard payday loan costs can be over 500%! Costs can be even higher for consumers that "rollover" their loans to extend the repayment period.
  2. No rollovers allowed- Rolling over a payday loan is a common industry practice used to extend loans and increase profits on a loan.  The MLA prohibits rollovers, to prevent excessive charges. The CFPB compiled data on 15 million payday loan transactions from 1.5 million borrowers over the course of a year, and found that two-thirds of borrowers had seven or more loans in a year - most of which were rollover loans. According to the CFPB, the median borrower paid a whopping $458 in fees for a $350 loan amount because of fees and rollovers.
  3. You cannot forfeit your rights as a servicemember- The law protects you from waiving the protections you’re granted under the MLA. Lenders are prohibited from requiring you to waive your right to legal remedy in a court of law.
  4. Not required to use the military allotment system- The CFPB will be on the lookout for lenders that force servicemembers to make payments directly through the debiting of paychecks. Paying this kind of debt by allotment can add to the costs. Some lenders compel borrowers to open a separate account to pay the debt that comes with hidden or confusing fees. Paying by allotment can also lead to forfeiting legal protections, such as the ability to dispute a payment.

Action Plan

  1. Use a short-term loan only as an option of last resort.
  2. Before taking out a payday loan seek out an on-base financial representative or call the Department of Defense at 1-800-342-9647, to get information on the MLA, alternatives to payday loans, financial planning advice, and other guidance.
  3. Research a lender before taking out a loan. If you have to work with a payday lender, only borrow from a lender that is licensed to lend in your state. Every state has a regulator for payday loans.
  4. Know the collection laws in your state so that you know what steps the lender can take to collect from you if you default on the loan.
  5. Be wary of any loan with a repayment term longer than 91 days, as MLA protections may not apply.
  6. Check with on-base financial managers before finalizing any loan, especially loans that are often predatory, such as a payday loan or auto-title loan.
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