State and federal consumer protection officials told Congress this week that more needs to be done to protect members of the military from predatory lenders and other shady businesses, including more consumer education and law enforcement.

A decade ago, researchers and military advocates began to document the fact that the communities around military bases across the country were suddenly saturated by payday lending stores. Concerned that the businesses were intentionally preying on military members, their steady paychecks and the general lack of financial acumen that accompanies the average 19-year-old, Congress passed the Military Lending Act in 2006. The law capped the annual percentage rate lenders could charge at 36 percent.

But Holly Petraeus, the director of the Consumer Financial Protection Bureau’s Office of Servicemember Affairs, said the law and the regulations the Defense Department wrote to implement it contain numerous loopholes. And shady lenders have found them.

“The spouse of a wounded warrior in the Illinois National Guard took out an auto title loan of $2,575 at an APR of 300 percent. The finance charges on the loan were over $5,000, and the loan was not subject to the MLA because it was longer than 181 days,” she said. “Service members from North Carolina and Delaware each took out loans at 584 percent. The loans were not subject to the act’s protections, because they were open-end lines of credit. At Joint Base McGuire- Dix-Lakehurst, N.J., a sailor had one loan at 499 percent and another at 197 percent, neither covered by the MLA. He was paying over 66 percent of his take- home pay on those two loans.”

Some lenders have figured out an easy way around another key protection for military members: the Servicemembers Civil Relief Act. That law caps interest rates under some circumstances, protects them from eviction and grants numerous other protections.

Easy targets

Dwain Alexander, the senior attorney for the Navy’s mid-Atlantic region legal service office, said unscrupulous used car dealers near military bases routinely insert clauses in their financing contracts in which the military member agrees to waive the SCRA protections. Then, the lender can easily get a default judgment in court if a borrower misses a payment. The contracts also tend to require that if the service member wants to dispute some aspect of the deal, it has to be handled through private arbitration, not in court.

Alexander said those dealers set up shop as close as possible to military bases and see servicemen and women as easy targets for deals that aren’t in their best financial interest.

“They’re all young, generally junior in rank, most only have a high school education,” he said. “For them, their pay is guaranteed. It’s recession-proof. So when the recession hit and cars couldn’t be sold, my guys could buy cars. When they go into a business, people know how much they make just by asking a few questions, because their pay is public knowledge. And their pay is easy to garnish.”

Consumer advocates say the targeting is not limited to used cars and short-term loans. A Senate Commerce Committee hearing Wednesday focused in particular on one company that already has paid multimillion dollar consumer fraud settlements in two states, under different names, and still is operating.

In Tennessee, the company was called Britlee. It operated an extremely lucrative mall kiosk that sold computers, video game consoles and other consumer electronics just outside Fort Campbell, which straddles the Kentucky-Tennessee border.

It attracted soldiers from the nearby base by advertising special deals for military members, said Robert Cooper, the Tennessee Attorney General.

“They falsely claimed that that they were offering zero percent financing. This was called, at different times, ‘free financing,’ ‘100 percent military financing,’ or ‘special programs for service members,’ but it was really a 19.2 percent APR, not counting other hidden fees and contract terms that were in the arrangement,” Cooper said. “And then they engaged in abusive collection practices, including contacting superior officers.” Also, the company allegedly marked up the prices of the electronics it sold soldiers by more than 300 percent. But the service members who bought those items never saw the retail price they were actually paying. Instead, Cooper said, Britlee marketed its goods based on the cost of regular, recurring payments, and insisted that service members pay via automatic allotments from their paychecks.

“They had soldiers making the purchase go online on the spot, access their military pay accounts and set up bank accounts in Kentucky,” he said. “Predictably, these payments were very difficult to stop, even after the court enjoined further collections.”

Investigation illustrates scheme

A Tennessee judge ordered Britlee to stop those collections, dismissed all of the company’s lawsuits against soldiers who’d fallen behind on payments and ordered the company to clear up their credit scores. The service members also were allowed to keep their computers.

But the company soon moved to a new location just outside Fort Drum, N.Y.

When a middle-aged female employee from that state’s attorney general’s office paid a visit to check the business out, a salesperson made it clear that she was outside the company’s target demographic. The vendor advised the undercover investigator to just go to Walmart, said Deanna Nelson, the assistant attorney general in charge for Watertown, N.Y.

“As we called some of the staff of this organization into our office to get more details, we learned that’s exactly what they were doing. They’re buying these computers from Costco or Walmart or Sam’s Club, tripling the price, and then taking a 19 percent interest fee,” she said. “When you dug into the transaction itself, the computer may have been an $800 computer that was being sold for $2,400, but even that wasn’t obvious to a soldier, because the prices were portrayed to them per-paycheck. $60 seemed reasonable to them. So as long as they could get that soldier to sign on the dotted line, set up an allotment payment, get their bank information, which could happen in less than 10 minutes, that’s all that they were interested in doing. And they’re not the only ones.”

In a settlement with the attorney general, the company, which went by the name SmartBuy in New York, agreed to cancel a total of $12.9 million in debt the company had on its books against service members. But the state investigation found the same company was also operating under various names, outside its jurisdiction, in Texas, California, Colorado, North Carolina, South Carolina, Oklahoma and Georgia, Nelson said.

Consumer and service member advocates say it’s important to continue the law enforcement approach against predatory business practices. But they also acknowledge that the marketplace for those practices could be quickly shut off if young service members stopped signing terrible business deals. And that’s a tough challenge, said the Navy’s Alexander.

“They’ve been trained to respect and respond to authority, and that’s critical for us in the military. When we ask somebody to swab a deck or to charge an enemy position, it’s not a debatable issue. But for young people, that’s not something they can just turn off,” he said. “So when they go into a business, and the retired somebody says, ‘You need to do this, I’m gonna take care of you’, they comply.”

Petraeus said the CFPB wants to start delivering some basic information on financial education as early as possible in a service member’s career, even before they reach boot camp. She says her agency is working with DoD to develop training materials that new troops would have to consume immediately.

“Because basic training is kind of a stressful time to absorb good financial education. You’re tired, you’re stressed, you’re scared of the drill instructor,” she said. “We’re going to do a little product that can be accessed by computer before they’re even there. The recruiter will say, ‘Go to this website, take this short financial course and show me that you did it.’ We’re hoping again to catch them before they even get that first military paycheck, or get that first trip to the local mall when they’re at basic training and may be tempted by that kiosk that they find there.”

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