Protecting Military Servicemembers From Predatory Loans Is A National Security Issue

In recent years, we’ve written a number of stories about laws aimed at protecting active-duty servicemembers and their families from predatory loans and the businesses that try to take advantage of loopholes in these rules. Some readers have asked why members of our armed forces merit protections not available to civilians. But this isn’t about just doing something nice for our soldiers; it’s about removing a threat to national security.

Laws like the Military Lending Act are intended to reduce servicemembers’ likelihood of ending up in debt to predatory creditors by capping interest rates on loans at 36%; prohibiting “roll over” loans where you pay off an existing debt by taking out a new loan with the same or less-favorable terms; eliminating forced arbitration with creditors; banning creditors from requiring that you carve out an automatic amount of money from your paycheck to pay back your loan; and forbidding prepayment penalties for borrowers who pay back some or all of a loan early.

These rules effectively ban servicemembers from taking out payday lenders and similar products that tend to trap borrowers in high-interest debt spirals.

While it’s bad for any consumer to end up with revolving debt that requires loan after loan to pay back, there are particular concerns when that borrower is a servicemember.

Someone looking for unauthorized access to military information or assets may be able to leverage that debt in their favor. This is why servicemembers with significant debt on their credit reports might end up having their security clearance lowered or taken away.

And some debt collectors are using this dangling sword of career-ruination to compel armed forces to pay up, threatening to reveal their financial situation in a way that will negatively impact the borrower’s position in the armed forces.

According to the Holly Petraeus — Consumer Financial Protection Bureau Assistant Director, Office of Servicemember Affairs and wife of retired four-star general David Petraeus — more than 11,000 servicemembers, veterans and military families have filed complaints with the CFPB about debt collections since July 2013. She says this is the Bureau’s fastest-growing complaint category.

Some of those collectors have allegedly told servicemembers that they would tell the borrower’s commanding officer about their outstanding debt. Such contact would be illegal, but the threat is enough for those unfamiliar with the rules set out by the Fair Debt Collection Practices Act.

But even if a collector doesn’t threaten to directly alert a soldier’s superiors about this debt, the collector can still say that unpaid debt will end up on a servicemember’s credit report. And when that servicemember comes up for review, their security clearance may be reduced or revoked.

Thus, some servicemembers are not getting promotions and clearance they otherwise deserve, meaning someone less qualified — but without unpaid debt — may be boosted up the ladder ahead of someone who should rise in rank.

In a blog post for the CFPB, Petraeus says that unpaid debt need not be a career-killer if the indebted servicemembers handle it correctly.

“If you find that your finances have put your security clearance in jeopardy, you should do your best to show that your financial problems resulted from circumstances beyond your control (not a pattern of irresponsible behavior) and that you acted as responsibly as you could under the circumstances,” she explains. “This may include showing that you’re currently living within your means, that you’re making a good-faith effort to resolve your unpaid debts, and that you’re disputing debts that aren’t yours.”

Servicemembers with financial issues can — and should — seek out free assistance and advice from their installations’ Personal Financial Manager (PFM) and/or JAG office, says Petraeus.

Even those who have have their security clearance damaged by debt can appeal their case to an Administrative Judge of the Defense Office of Hearings and Appeals, where they can explain how they ended up in debt and what they’ve done to address the problem.

“Managing your debts, expenses, income and other personal finance matters is more than just a tactic to guard your security clearance,” writes Petraeus. “It’s also a day-to-day exercise that can help lead you and your family to financial security.”