Time to fix the Military Lending Act

The “Today Show” recently highlighted the very real, day to day economic struggles of military personnel and their families, who should never need worry about their financial security when they are focused on securing our nation.  

Yet the annual survey by Blue Star Families indicates that worries over personal or family finances are service members’ top stress inducers. The 2019 Military Financial Readiness Survey conducted by the National Foundation for Credit Counseling and Wells Fargo found that service members are twice as likely to be unable to pay their bills on time as they were five years ago. About 10 percent said they currently have debts in collection.

Just as troubling as their struggle to meet weekly food bills, credit card debt, and juggle funds to cover expenses is that the Department of Defense has put in place policies that make the financial status of servicemen and women and their families potentially more precarious. 

Today, there are military personnel paying off new car and truck loans for vehicles that were totaled in accidents or by natural disasters, such as hurricanes, in part because the military will not allow them to purchase a common form of protection, what is known as a Guaranteed Auto Protection or “GAP” waiver. Some members of my association would otherwise be able to offer service members the option to purchase such insurance.

When you buy or lease a new vehicle, it depreciates in value as soon as it leaves the car dealership. A standard insurance policy usually covers the depreciated — or current — value of a car at the time of an accident. 

But some military personnel — as well as other younger consumers, who are buying their first auto — tend to put down smaller deposits and take out loans with longer terms. In the event a serious accident totals a car, a GAP covers the difference between what the insurer pays, its fair market value and the amount owed on the loan or lease.

In an effort to protect military personnel from predatory payday lenders and unscrupulous businesses, Congress passed the Military Lending Act (MLA), which put in place protections for various extensions of credit, but excludes auto loans. The Department of Defense, however, in 2017 crafted an interpretive rule that swept up the GAP waiver in a broader effort to protect military personnel from what was perceived to be unnecessary products.

The Pentagon essentially said that it was fine for a service member to add the cost of snow tires or leather interior to a car loan, but voluntary protection products, such as buying GAP insurance, were not. As a result, service members have limited protection for a significant purchase and a financial shock. This situation highlights two areas that should be addressed. 

First, one of the reasons policymakers passed the MLA was a lack of financial literacy among young service members. Many military personnel enlist at a young age, with little experience in managing their finances or building credit, a perfect storm for predatory lenders. There are a number of good financial literacy resources out there to provide guidance for those embarking on their careers and in need of advice on everything from savings accounts to building good credit and being a savvy consumer of financial services. With data revealing that a vast majority of American households live paycheck to paycheck, policymakers need to put a renewed emphasis on financial literacy.

Second, the Department of Defense must look at some of the regulations it put in place in the process of implementing the MLA to determine whether those policies are actually hindering the financial security of military personnel. Thus far, the department has declined. The Trump Administration should order such a review immediately.   

The men and women of our Armed Forces should be focused on their mission, not worrying about how to pay unexpected debts, how they will get to work without a vehicle, or bad-actors taking advantage of their finances. The burden they bear to keep our nation safe is great enough. The least policymakers can do is put in place sound policies and fix the ones that are hindering our military families from a bit more financial certainty and security.

Bill Himpler is President and CEO of the American Financial Services Association, a trade association dedicated to preserving access to affordable credit for the American consumer.