Last fall, as stories surfaced about military families preyed upon by lenders charging 400% and more, the DoD issued a report explaining that overwhelming debts were impairing military readiness. Congress responded with a new law to limit the interest rate that can be charged to military families. The cap is 36%–steep, but far better than what was out there.
Credit card issuers and banks charging verdrafts had lobbied Congress to be exempted from the new regulations. Congress refused, bolstered in part by consumer groups arguing that 400% effective interest is 400%, regardless of who collects it.
After the bill passed, the consumer finance industry shifted their lobbying efforts to the DoD. The lobbying paid off. The new DoD rules drafted by the DoD excludes credit cards, car loans, home equity loans, reverse mortgages, refinancing and tax refund anticipation loans. The banks declared themselves pleased. Congressional Daily quotes the Financial Services Roundtable rep as saying, “Overall, it seems that it tracks pretty close to our recommendation.”
The basic question is whether it matters who is charging 400% interest–or more. The DoD seems to buy the argument that this isn’t about high rates, but about the structure of payday lending.
Gee, I thought it was about money–and how lenders have taken advantage of the financial strains and sometimes the lack of sophistication to take advantage of these families. Little did I realize that the outcome doesn’t matter–only how it was done.
The lenders made the same argument they make in response to every effort to regulate credit: if you don’t let us do what we want, we won’t lend to these people at all.
But that argument proves too much. Military families are good risks–steady paychecks, can always be found, won’t have medical debts. It is well known around the base that not paying debts can damage a military career. Besides, nearly all military families are eligible to join excellent credit unions. Those credit unions operate under much stricter laws than a 36 percent usury cap, and yet they prosper. It is possible to make a very tidy profit lending to military families at rates less than 36%, but the profits won’t be as juicy as they are in a world without interest caps.
The issue isn’t quite dead. The DoD’s regulations are subject to 60 days of public comment. If there is enough bad press over this, the DoD may rewrite the regulations. And military families may get the stronger protection they deserve.
