Thursday, July 20, 2006

Senate moves to limit financial sales to military members 
From the New York Times' Diana Henriques:

After two years of Congressional study, the Senate approved a bill yesterday that would tighten the rules governing the marketing of life insurance and high-cost mutual funds to American military personnel.

The measure differs slightly from a companion bill approved by the House last summer, 405 to 2, and those differences must be ironed out before final enactment. But sponsors of the Senate bill said yesterday that they were confident that the two versions could be reconciled, given their broad bipartisan support.

There ain't no way this one ain't passing! The only question is how much teeth and scope will it have?

Read on:

Like the House bill, the Senate version would give state regulators clear jurisdiction over insurance sales on military bases within their borders and would require the Defense Department to report people who violate military sales rules to those licensing agencies. It would also establish a central registry for tracking the agents base to base.

Both measures abolish an archaic form of mutual fund, known as contractual plans, with sales charges that consume half of an investor’s first-year contributions. Contractual plans have virtually disappeared from the civilian market, but they continued to be promoted heavily to military personnel until about 18 months ago.

The largest seller, First Command Financial Services of Fort Worth, dropped the product in December 2004. Without admitting or denying wrongdoing, First Command paid $12 million to settle lawsuits in which federal securities regulators accused it of deceptive sales practices.

So far, so good. So what's not covered?

The Senate bill does not include House provisions that would bar military lenders from using threats, appeals to a commanding officer or involuntary garnishing of a service member’s pay. But Senator Clinton said she did not think that those differences were “deal breakers.”

No, and they shouldn't be. First of all, the use of threats in collections is already prohibited by the Fair Credit Collections Act. Second, if a servicemember owes the money, he or she owes the money. I don't see why a servicemember ought to be exempt from the due process of law that applies to everyone else. If garnishment is not an option, the creditworthiness of all servicemembers will take a hit, and legitimate creditors will be less likely to be willing to lend to servicemembers, or expect higher interest rates to compensate them for the inability to pursue judgements and subsequent garnishments.

Furthermore, such a rule would allow anyone who got in over their heads to join the military in order to avoid/delay/deter creditors, in a sort of blue-collar version of offshore asset protection planning.

These are not the kinds of people the military wants.

Third, as a commanding officer, if I have a soldier who is having debt trouble, I want to know. If the debt problems are serious, I know whether the soldier is moonlighting or why, I can counsel him on the command policy regarding moonlighting before it becomes a problem, I can refer the soldier to credit counseling - even make it mandatory - and in extreme cases I can refer the soldier to one of several relief organizations that may be able to help.

If creditors can't approach me with problems, it's not that I can't help them. It's that I can't help the soldier.

As a reserve component commander, I get very few appeals from creditors. If I get any at all, it's from AAFES, and usually on very small amounts. On active duty, it's a much bigger concern.

The matter of abusive military lending is more likely to be addressed, she said, in negotiations over the House and Senate versions of Defense Department authorization bills. The Senate version, unlike the House bill, would limit the interest rate on loans to service members to 36 percent — effectively ending military access to “payday loans,” which are very short-term loans with finance charges that can run up triple-digit annual interest rates.

No, it will definitely NOT end military access to "payday loans," for the simple reason that it is very difficult to lend at interest rates above 100% APR and still manage to lose money.

Well, I suppose the retards that run these shops could manage it, but that's not really my concern. Consider:

1. The average payday loan borrower has to cough up $800 to repay a loan of $325.

2. The average payday loan is recycled, or flipped, eight times by the same lender. That's (1.36 x loan amount)^8!!!!!!

I support the policy recommendations of the Center for Responsible Lending:

1. Set a minimum repayment period of 90 days, with no prepayment penalty.

2. Eliminate the use of the personal check as collateral. (This would be bad for payday lenders, but good for pawn brokers, as it would drive business their way. Which is cool because I love pawn shops, and bought my first real fiddle at one. Plus, it's much easier for soldiers to walk away from a valuable securing a pawn shop loan than it is for them to swallow the threat of bounced check fees and possible legal problems.)

3. Eliminate the mandatory arbitration clause. The real reason these bastards insert mandatory arbitration clauses in their contracts is to neutralize the threat of class action lawsuits. They know their business model wouldn't stand up in front of a jury, and so rely on mandatory arbitration to isolate their customers from the communities from whence juries are drawn.

4. I part company with the Center for Responsible Lending on this one: Let the market set interest rates. All lenders should be required to disclose their APRs as well as the nominal interest rates on the loans. All lenders should further be required to disclose the AVERAGE amount of interest collected per dollar lent at that branch over the trailing three-year period. No signed disclosure, no collectibility on the loan.

Then the soldier still has access to the trash credit markets, but is in a position to make a more informed choice.

5. Commanders on active duty should appoint financial education NCOs. These soldiers can take a certifying course via AKO, and make approved financial education materials available to soldiers. Care should be taken to ensure that these NCOs receive training via an independent source, and are therefore hopefully less vulnerable to financial misinformation.

In practice, this may be very difficult to do, because financial professionals themselves cannot reach consensus over permanent cash value insurance policies vs. buy-term-and-invest-the-difference approaches. But there's a lot we can do, nevertheless.

Splash, out


Jason, third party collections are covered under the Fair Debt Collection Practices Act. First party collections are still under FTC guidelines of 1969, and of course there are state laws that usually are far tougher. On the matter of garnishment, I believe the Soldiers and Sailors Relief Act of 1942 still applies. Garnishment isn't going to happen.
Last, under terms of the FDCPA, contacting an employer for help collecting a debt is a major offense, say $1,00.00 fine plus attorney's fees and costs. Since most state laws mirror the FDCPA but also apply to first party collectors, your payday lenders are crossing the line.
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