Consumer Group Says Military Targeted in Lending Scams
By Sgt. 1st Class Doug Sample
American Forces Press Service
WASHINGTON, June 6, 2003 On his drive to work each day at Naval Station Mayport, in Jacksonville, Fla., retired Navy Capt. Bill Kennedy, a former aircraft carrier commander, passes three pawnshops, and two Cash Advance and two Florida Internet businesses.
These businesses, all within the final two-mile stretch before the base's main gate, anger Kennedy, who now heads a branch of the Navy-Marine Corps Relief Society. This nonprofit agency provides Navy and Marine Corps families with financial assistance and interest-free loans during family crisis.
Kennedy said he has helped hundreds of military families who have sought financial relief from what he calls "quick-cash" businesses and who ultimately get "hooked" into a relentless cycle of high-interest loans.
It's a poor choice," Kennedy said. "They don't have credit with the credit union, they don't have credit at the bank, they don't think of Navy-Marine Corps Relief, or they think of it too late. They see this instant cash and 'boom,' they're hooked."
On May 27, Kennedy was a part of a team of consumer advocates in Washington to talk about businesses they say are preying on the military, by offering quick cash through high-interest loans. During a press briefing, Steve Tripoli, a consumer advocate with the National Consumer Law Center, accused "quick cash" lenders of targeting the service members and veterans with unfair lending practices.
NCLC issued the 66-page report that day, entitled, "In Harm's Way -- At Home: Consumer Scams and the Direct Targeting of America's Military and Veterans." The center is a nonprofit organization that works to address consumer issues, especially those affecting low-income consumers.
Tripoli said the problem with these businesses is that they prey on the military, many of who have low incomes and live on fixed incomes, by offering loans at higher than normal interest rates.
These loan businesses are using deceptive practices that violate federal laws, he said, citing provisions of the Truth in Lending Law, designed to inform consumers of the amount that credit will cost.
Tripoli added that many high-interest loans could be in violation of state laws that prohibit unfair, deceptive acts and other fraudulent practices in the marketplace.
In addition, he said some states also have usury laws, which place a cap on the allowable interest rates a business may charge; however, he added, "those laws are seldom, if ever, enforced."
"They (service members) are absolutely under siege by these businesses," Tripoli said. He illustrated his point with a slide presentation that showed how various cash-advance stores, quick-cash lenders, and auto-title pawn shops had set up shop on the main road leading to Kings Bay Naval Submarine Base, Ga.
"How bad do service people fall for it? Certainly because they mismanage their money, in some cases," he said. "But that's not very hard to do when your salary is low and you're young and inexperienced," he added.
Tripoli said military personnel are "particularly vulnerable" to quick-cash lenders because of economics and demographics.
"Service people are attractive targets because they are younger, their paychecks are of a very stable source -- the U.S. government; They' re not about to be laid off and apparently are facing -- especially the younger ones - - more financial pressures early in life," he explained.
Meanwhile to get military personnel to borrow money, Tripoli noted that many lenders give their businesses names that sound military affiliated.
Those cited in the report include names such as Pioneer Military Lending, Veterans First Financial Service, American Military Debt Management Service and Armed Forces Loans. Tripoli said that such names tend to make people think these companies are catering to the military.
Tripoli said these companies use advertising in military newspapers to get military personnel to apply for loans.
"They cram their promotional literature with expressions of concern for military families," he said. He added that advertisements in military newspapers lead service members to believe that these national newspapers are official newspapers when in fact they are not, he said.
According to the report, what's common about businesses that offer cash advances on personal checks, or payday loans, and others often disguised as phone-card, Internet and catalog-sales companies is that they loan small amounts of cash for short terms at exceedingly high interest rates.
For example, Florida Internet offers its customers a series of instant-cash rebate options in exchange for signing up for Internet service.
One reported option is a $480 rebate when customers commit to a year's Internet service. The cost is $80 every two weeks, automatically deducted from customer's bank or credit card accounts, for up to eight hours' service. And the Internet can only be accessed at the company's handful of storefront sites.
When NCLC advocates visited two companies, they found four terminals, two at each company. However, none of the computers was in use, Tripoli said.
Although unlimited Internet access on a home computer can be purchased for about $20 a month, the report says customers buying the $480 rebate option will end up paying $2,080 ($173.33 per month) for a year of limited service (eight hours every two weeks). The result: The $480 rebate that costs $173.33 monthly for one year translates into a 421.6 percent annual percentage rate.
The report said that phone-card sales companies operate in a similar fashion. In one example, a company near Marine Corps Base Camp Lejeune, N.C., sold phone-card memberships that provide an instant $300 cash back rebate. In exchange, the borrower agrees to purchase 300 minutes worth of phone cards at a cost of $67.50 every two weeks, or $135 a month over the next year.
Tripoli said this means the $300 rebate amounts to 533 percent annual percentage rate.
Customers who use catalog-sales companies for cash advances rarely use the catalog coupons issued by the company in exchange for the advances, Tripoli noted. And he says the products offered by catalog sales companies are "very high priced" and "of low quality." He added the products are subject to outrageous shipping and handling charges that make the purchases not worthwhile.
The report also targets auto-title pawn dealers that provide short-term loans based on a vehicle's value, using its title as collateral. In many cases, if the borrower defaults on the loan, the lender claims the vehicle for a fraction of its value.
Despite unfair lending claims by the NCLC, the Community Financial Services Association, formed in 1999 to ensure fair practices in the payday lending industry, said its association of lenders helps military personnel and their families.
In a press release issued the day of NCLC's announcement, Lynn DeVault, president of the association, defended association lenders saying, "We are in the business of helping families through difficult financial times."
According to CFSA, many of its association lenders are waiving fees and suspending collection on outstanding advances of deployed military personnel. Other companies have canceled late fees on overdue loans, the release said.