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April 01, 2008

Removing the Target: Protecting Military Service Members and Veterans from Financial Predators

by Christopher L. Peterson

The nation’s rallying cry in recent years has been “Support the troops!” While America’s leaders unanimously embrace this sentiment, the depth of our actual commitment to the welfare of service members and veterans is less clear. Headlines proclaiming negligent medical care, never-ending overseas deployments, and inadequate body and vehicle armor provide a troubling analogue to a host of questionable financial products and outright scams marketed in military communities.

Service members and veterans face a variety of special challenges that can make them particularly vulnerable to financial predation. The great majority of service members are young, junior enlisted personnel who are frequently from economically challenged backgrounds. Moreover, most enlisted personnel have limited education experiences—indeed, the opportunity to save for an education is one of the primary benefits of military service. Military life takes service members to distant bases and outposts, far from family support networks that help most civilians in financial crises. Further, service members and veterans are tempting targets for financial predators because of their steady government paychecks. Unlike civilian employers, Uncle Sam rarely fires its service members, and many veterans can expect uninterrupted pension benefits. Military records make it easy to market to and track service members. And military culture and codes of conduct demand prompt repayment of even onerous and unfair debts.

Questionable Practices

Given these factors, perhaps we should not be surprised that journalists, academics, regulators, and military officers have documented a variety of questionable insurance polices, investments, and loans specifically designed to bilk unsuspecting service members and veterans. For example, a series of New York Times exposés found thousands of service members and veterans who had purchased overpriced and useless life insurance policies. Aggressive insurance salespersons had pushed the insurance as a way of saving money, even though the policies actually held little or no redemption value for the great majority of service veterans. Ironically, all of the service members qualified for cheaper, better life insurance offered by the military itself. Beyond insurance, similar patterns have emerged with respect to high transaction fee mutual funds and high interest rate loans requiring veterans to assign away their pension benefits. Moreover, military bases all around the country are often surrounded by car dealerships, rent-to-own home furnishers, and finance companies that specialize in misleading sales, quasi-legal practices, and bareknuckle collections.

Among the most aggressive and controversial lenders marketing their services to military personnel in recent years have been “payday” loan companies. Payday lenders hold a borrower’s postdated personal check in exchange for a cash advance. While borrowers like the convenience, flexibility, and anonymity of payday loans, the obligations come at a steep price: average interest rates of around 450 percent. By way of comparison, the average interest rates on typical New York City mafia loan shark debts in the 1960s were a relatively modest 250 percent. Payday loans typically have short initial durations of about two weeks. But the average borrower cannot pay off the entire debt when the two weeks are up, creating what industry critics describe as a debt trap.

Potential Solutions?

In 2005 a geographic study published in the Ohio State Law Journal suggested that payday lenders disproportionately cluster around military bases. After the study was confirmed by an extensive Pentagon investigation, Congress adopted legislation limiting the price of most loans made to military service members to no more than 36 percent per annum. The statute also provided new protections against questionable insurance products. Further, it prohibited the use of mandatory binding arbitration agreements that some companies have used to prevent service members from asserting their legal rights in a court of law.

The new legislation attempting to prevent predatory lending to military service members went into effect in October 2007. While the new rules are a step in the right direction, regulations adopted by the Pentagon do not apply the new usury limit to either banks in general or credit cards in particular. It is unclear whether the thousands of payday lender locations doing business near the gates of military bases will close up shop, offer loans within the legal limit, or search for loopholes in the new regulations that would allow business as usual. For those who hope for civilized limits on commerce with service members and veterans, it remains to be seen whether Congress has succeeded in removing the target from the backs of our nation’s military community.

Christopher L. Peterson

Christopher L. Peterson is a professor of law at the University of Utah. He coauthored, with Steven Graves, the geographic study mentioned in the text.