The more government is involved the more unintended consequences.

Federal Regs Making it Difficult for Members of Military to Borrow Money

Ike Brannon

January 14, 2015 

Ever since the creation of the Consumer Financial Protection Bureau, or CFPB, proponents of robust economic growth and sensible regulation have been trying to rein it in.

The legislation that created the Bureau – which was a provision of Dodd-Frank – funded the CFPB via the Federal Reserve. The aim of doing so was precisely to insulate the CFPB from the power of the Congressional purse, something that sets it apart from every other executive branch agency. 

It is not mere rhetoric when Rep. Jeb Hensarling (R-Texas), the chairman of the House Financial Services Committee, called the CFPB “the single most unaccountable agency in the history of America.”

With Republicans now in control of both houses of Congress the CFPB is squarely in the crosshairs.  Joseph Lawler of the Washington Examiner noted that with November’s elections “no achievement of President Obama’s faces more risk from a Republican Senate than the Consumer Financial Protection Bureau.”

A good place for Congress to start in its quest to subdue the CFPB would be the bureau’s obsession with the military. At first blush, it might seem that protecting young service members from unscrupulous lenders is both a salutary policy choice and also politically astute, but the ultimate result of its latest actions will be to dramatically restrict the ability of people in the military to borrow money. 

Thus far, the efforts appear to be more about achieving minor settlements and then playing them up to be something much more than that in the press. For instance, in August the CFPB issued an overheated press release with the headline announcing that  “CFPB Shuts Down USA Discounters’ Service Member Fee Scam.”

The scam turned out to be a $5 fee that the company charged some of its customers for services related to a consumer-protection law. The CFPB determined that current law dictates that companies provide such services for free and ordered the charge refunded. USA Discounters, an installment loan company with 31 stores across the country, refunded $350,000 of fees collected over five years – about $2,000 per store per year in overcharges – and paid a $50,000 fine.

It’s easy to ridicule a federal agency that applauds itself for uncovering a miniscule “scam,” but the bigger problem is that the CFPB’s harassment of small lenders like USA Discounters makes it more difficult for members of the military to borrow money. This is largely by design, of course: The CFPB effectively declared war on payday loan companies shortly upon its inception and managed to put a wide swath of the industry out of business. These days it has set its sight on the installment loan industry, which charges lower interest rates than payday loan companies but commits the cardinal sin of extending credit to low-to-middle-income families that banks by and large won’t touch. 

The notion that service members need some sort of special protection from the government comes across as both unnecessary and condescending. In stark contrast to leftist rhetoric suggesting that our soldiers largely consist of poorly educated hayseeds from flyover country, the fact of the matter is that our nation’s military attracts more than its share of highly motivated, intelligent, men and women, something economist and veteran Tim Kane showed in his book Bleeding Talent.

What is true is that service members tend to be overwhelmingly young, male, and single, and without much credit history.  Deterring finance companies from lending to them doesn’t mean that soldiers are now going to borrow money at banks: it means that they’re more likely to not borrow money at all, or else go to completely unregulated lenders in the underground economy.  

Maybe CFPB believes that most young soldiers ought to be able to get by without a car or furniture or whatever they’re buying with credit, but that’s not the government’s decision to make.

At a time when many banks have deemphasized consumer lending – or made it onerous to get a simple loan – installment lenders have filled the breach for Americans without sterling financial track records. These firms, many of them small chains, extend credit for all sorts of things. For instance, a bread-and-butter loan for these lenders is $2000 to buy a home gas-fired furnace with equal monthly repayments over three years. Often, there’s no other way for their customers to obtain credit.

Certainly, there are bad actors in any business, but the CFPB has gained a reputation for portraying minor missteps as major catastrophes. Another recent example involves a chain called Freedom Stores, a retailer of computers, TVs, and furniture with a focus on service members: in fact half of its workforce are either veterans or spouses of service members. 

After a four-year investigation, the CFPB managed to come up with practically nothing, but it still forced a settlement over completely legal practices, since few small business can afford to go toe-to-toe with the CFPB. The focus of the bureau’s attention in this case was a clause in the loan agreement that establishes the state of Virginia as the venue for any litigation that might arise from past-due loans.

A better use of CFPB resources – if it really wants to help the military – would be financial education, which is something that the military and even consumer lenders are already doing. Freedom Stores last year gave 1,000 customers a $100 retail credit for successfully completing a consumer finance course called MoneySkill. 

Another way it could help soldiers save money would be to encourage the Pentagon to revamp its antiquated pension system that gives soldiers who retire after 20 years a generous pension worth half (or more) of their annual salary but leaves fully 85 percent of all former soldiers without a pension after leaving the military. 

But finding and ending “scams”, whether real or imagined, that supposedly exploit our men and women in uniform will always be more politically palatable than the unsexy business of financial education.  Especially when the CFPB’s trying to justify its necessity to an increasingly skeptical Congress.