By Emma Coleman Jordan
Recently, the Department of Defense took the unusual position of urging aggressive pro-consumer protections for predatory loans extended to service men and women. In a new report, link here, DOD called for drastic federal restrictions on the types of loans that can be made to military personnel.
The DOD study documents the fact that some lenders have concentrated their predatory practices, which I have discussed in an earlier post, in the areas near military bases. The Defense Department argues that our fighting men and women cannot protect themselves against predatory practices such as payday loans, car title loans, income tax refund anticipation loans, and imprudent loans made to servicemen and women whose income could not possibly support repayment.
A virtually fixed point of division between libertarian economic thinkers and their progressive critics is the disagreement about the role that government should play in regulating consumer credit. For many years, before risk-based pricing became firmly installed in the market, libertarians argued against interest rate ceilings and direct government control of the terms of consumer credit, beyond disclosure.
The libertarian economic view, exemplified in the work of economists Milton Friedman and Gary Becker, is that price regulation of credit works to the disadvantage of the least creditworthy borrowers. They argue that if you try to cap interest rates to protect borrowers with poor collateral or bad credit histories from the exhorbitant rates charged by creditors who would otherwise serve the riskiest end of the market; these creditors will simply withdraw and thus reduce the amount of legal credit available to borrowers who need it the most. This will in turn push these borrowers into the illegal markets run by loan sharks and organized crime.
The other side of this argument has been made by pro-consumer moderates and progressives alike. They argue that borrowers who have nowhere else to turn, should not be subject to predatory terms. So, progressives, like me, have long supported government regulation of interest rate ceilings, invalidation of contractual waivers of legal rights, and direct limits on the enforceability of loans made to borrowers who the creditor reasonably knows have no ability to repay the loan. These are just and even required. In a market economy in which the model of arms length bargaining simply does not apply for those with the least bargaining power; government serves to provide a necessary restraint on the imbalances of economic bargaining power common between creditors serving the poorest niche and their customers.
Now, the DOD joins the pro consumer side of this argument with its view that “a clear, unambiguous rate ceiling is justified given the high fees, interest and other charges associated with loans to Service members reviewed in this report, and the impact of those predatory loans on military readiness and troop morale." In addition, it urges that car title loans, payday loans using postdated checks written on bank accounts should be prohibited per se.
DOD calls for the following federal legislative reforms:
□ Interest rate cap of 36% for all military borrowers
□ Uniform price disclosure for all loans, except mortgages
□ Prohibit lenders from using checks, access to bank accounts and car title pawns as security for obligations
□ Prohibit provisions in loan contracts that require Service members and family members to waive their rights to take legal action.
□ "Waiver is not a matter of 'choice' in take-it-or-leave-it contracts of adhesion. "
So, the DOD must be given credit for recognizing that the very least men and women who are willing to die for their country deserve in recognition of their sacrifice is to have the government protect them from predatory lending practices.
Now the only question I have is, if this is good for soldiers, which it is, then why isn't it also good in general for the poor who are not soldiers? Why rely upon military exceptionalism for soldiers who are mostly poor, and not provide the same protection for their poor relatives back home?