It’s always interesting when consumer advocates use confusing arguments to make points about consumer credit issues that otherwise undercut worthy messages. That’s what occurred earlier this week in an opinion piece in Military Times. This approach doesn’t help achieve the worthy goal of providing greater economic security to our service members or the broader consumer marketplace that depends on access to credit for emergencies or every-day needs.
Let’s be clear: there are predatory lenders who offer “payday loans” or “title loans” that place consumers of all stripes — military service members included — in very rough financial straits with exorbitant interest rates and aggressive business practices. Credit companies and their trade groups, such as the one I lead, the American Financial Services Association, that advocate for and practice responsible lending have made it clear that such predatory lenders are pariahs.
To protect military personnel from such unscrupulous businesses, Congress passed the Military Lending Act (MLA), which put in place protections for various extensions of credit. The MLA is well intended but, has led to unintended consequences.
For example, the MLA hinders military personnel from purchasing Guaranteed Asset Protection (GAP), which protects them from financial harm if their vehicles are totaled. In setting this rule, the Pentagon allows service member to continue adding upgrades like leather interior to a car loan, but not financial protection from total losses for vehicles. If the goal of such rules is financial protection, this makes no sense.
The “Veterans and Consumers Fair Credit Act” legislation would cap annual percentage rates (APR) at 36 percent, not only for service members, but for all consumers. Much like the misguided GAP waiver policy in the Military Lending Act, this rate cap presents similar, unintended consequences for consumers.
While the American economy has greatly improved over the past several years, data continues to show that a vast majority of American households live paycheck to paycheck. The Financial Health Network estimates that more than a quarter of American consumers do not have “prime” or excellent credit. The financial standing of service members is just as precarious. The 2019 Military Financial Readiness Survey conducted by the National Foundation for Credit Counseling and Wells Fargo found that service members are twice as likely to be unable to pay their bills on time as they were five years ago.
Sometimes a family may need to borrow $500 to help cover unexpected expenses when their pay alone is stretched thin. Sometimes, a family may borrow money to help cover an emergency, such as repairing a car to get to work or buying a new refrigerator.
According to a study by Financial Health Network, to make a break-even loan at a 36 percent APR, the loan would have to be made for at least $2,600. For a loan to be made profitable at a 36 percent all-in APR, the loan would have to be for around $4,000. But most consumers are looking to borrow far less, amounts that most banks or other lenders cannot lend at a 36 APR given the regulatory costs imposed to service such a loan.
For example, a $500 six-month loan at a 72 percent rate would have a total interest payment of $110.09. A $1,000 12-month, 36 percent loan’s total fee is $205.55, double that of the smaller loan at the higher APR. Responsible lenders work with their customers to ensure such loans are manageable for them.
Policy proposals like rate caps have the unintended consequence of placing greater pressure on consumers to borrow more than they need, resulting in higher finance charges, longer repayment periods, and higher overall costs, despite having a lower interest rate. Many responsible lenders may no longer be able to offer small-dollar loans, pushing consumers to the predatory lenders that advocates claim must be avoided. Either way, whether they are service members or everyday working Americans, consumers are harmed.
For more than a century, member companies of the American Financial Services Association have been meeting the needs of consumers in need of solid and safe small dollar loans, about $50 billion annually. Add in auto loans, and the number jumps to well over a trillion dollars. Our members and their customers contribute significantly to our nation’s economic growth. Consumers — members of our armed services most of all — must be protected from bad actors, but not with blanket rules that fail to account for their very real needs and that risk bringing real harm to their economic security.
Bill Himpler is president and CEO of the American Financial Services Association, a trade association dedicated to preserving access to affordable credit for the American consumer.
Editor’s note: This is an Op-Ed and as such, the opinions expressed are those of the author. If you would like to respond, or have an editorial of your own you would like to submit, please contact Military Times managing editor Howard Altman, firstname.lastname@example.org.