Combatting predatory lending.

MANY Soldiers have experienced cash-flow problems that seem to peak just before payday, and for some the short-term answer to their money problems has been a so-called "payday loan." Since many borrowers are unable to repay the loans within the specified period, the already high interest rates escalate dramatically with each passing due date. The result often is Soldiers who are perpetually in debt to dubious lenders.

On Sept. 30, 2006, Congress addressed the problem of predatory lending practices aimed at military personnel by passing the Military Personnel Financial Services Protection Act. The legislation curtails unreasonable credit-interest rates paid by military personnel, limiting annual percentage rates to 36 percent, and establishes mandatory requirements for the sale of insurance and investment-advisor services on military installations worldwide.

Defining the Problem

People who take out "payday loans" because they are hard-pressed for ready cash sign away their future paychecks for high-interest-rate loans, then often find they are unable to pay back the loans. This can result in interest-rate escalations that in some cases can soar to more than 100 percent. It is unclear how many Soldiers and other service members have been harmed by this unethical practice, but the number of complaints ultimately prompted Congress to act.

Violations of the statute are punishable as misdemeanors, and contracts that violate the statute are considered void from their inception.

Results?

Although the Military Personnel Financial Services Protection Act seeks to curtail unreasonable interest rates, it does not eliminate the underlying reasons why people take out payday loans. Since most borrowers are financially distressed, have poor credit ratings and are not likely to qualify for low-interest loans from commercial banks or credit unions, it remains to be seen if limiting the APR to 36 percent will help military personnel or place them in worse debt.

The sure way to end predatory lending is for potential borrowers to avoid spending above their needs and to resist taking out loans they will be unable to repay as promised.

The Military Personnel Financial Services Protection Act:

* Applies to transactions involving the extension of consumer credit to a service member or a dependent.

* Applies to all payday loans, as well as to any loan to which the Truth in Lending Act applies--this includes tax refund anticipation loans, credit-card agreements and similar transactions.

* Does not apply to residential mortgages and loans for the purpose of purchasing personal property that secures the loan (though installment loans for furniture, cars, homes, boats and jewelry, and credit-card agreements that include taking a security interest in the purchased property are exempt).

* Does not apply to service members called to active duty for a specified period that is 30 days or less, or to National Guard and Reserve members not on active duty.

* Limits interest rates to no greater than 36 percent annual percentage rate (APR).

Steven Chucala is chief of client services in the Office of the Staff Judge Advocate at Fort Belvoir, Va.