Saturday, May 26, 2012

Broaden Credit Protections for Military Personnel

Four Democratic Senators and the Delaware Attorney General recently proposed a bill that would amend the Servicemembers Civil Relief Act (SCRA) to provide broader protections against abusive creditor conduct.  The bill was covered recently by American Banker magazine

The SCRA provides general protections to active-duty military personnel against unconscionably high interest rates in loans.  It also allows for the activated personnel to cancel residential leases and pause payments on a mortgage, and provides for debt-collection (and other) lawsuits, such as mortgage foreclosures, to be stayed while servicemembers are activated,and prohibits default judgments from being entered in such suits, so as to prevent the unfairness of making servicemembers litigate while otherwise engaged, often abroad or in a war zone.

The proposed bill, S. 3179, entitled the Servicemembers Housing Protection Act, would extend the SCRA's protections concerning leases and mortgage foreclosures to a broader array of activated personnel, and to deceased servicemembers' surviving spouses For the time being, the bill has been referred to the Senate Veteran's Affairs Committee.

It is about time the SCRA was strengthened, but the proposals are certainly not enough.  Private military contractors employed abroad in providing services to the military are in an equally unfair and untenable position in the event they are sued in a U.S. court, and should be equally able to invoke the SCRA's provisions concerning lawsuit stays as proper military personnel.  Spouses should be protected before the death of the servicemember.  

Finally, the weakest provision of the SCRA concerns the interest-rate cap.  For loans entered into before active-duty service began, the applicable interest rate is reduced to 6%.  This is one of the only federal caps on interest rates - generally the National Bank Act and Federal Deposit Insurance Act permit national banks and FDIC-insured banks to charge any rate of interest permitted in their home state, which allows banks to organize entities in states such as South Dakota and Nevada that have no usury limit through which they can make credit-card and other loans at unconscionably high interest rates.  

However, the SCRA limit is very narrow, and the SCRA permits predatory lenders to take unfair advantage of active-duty personnel by lending to them at unconscionable interest rates so long as the loan is executed during active military service.  

Congress did take some action in 2006 to address this situation, passing amendments to the 2007 Defense Authorization Act that cap interest rates on loans to military personnel at 36% and also prohibit certain payday lending transactions.  The provisions are summarized by the Center for Responsible Lending.   However, 36% is an absurdly high limit.  A financially marginal consumer with a substantial loan at 25% will often repay the loan multiple times over in interest payments over a period of years without ever reducing principal before finally defaulting as the result of an unexpected medical expense or loss of income. 

Some opponents of usury caps for servicemember loans argue that these will lead to tighter credit for servicemembers.  Allowing impoverished borrowers to further impoverish themselves by taking unsustainable loans that enrich unscrupulous lenders while preventing them from accumulating savings and ultimately ruining their credit is no good answer to this quandary.  Increased pay together with a federal low-interest lending program would present a far better solution.

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