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«OHIO STATE LAW JOURNAL VOLUME 66, NUMBER 4, 2005 Predatory Lending and the Military: The Law and Geography of “Payday” Loans in Military Towns ...»

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682 OHIO STATE LAW JOURNAL [Vol. 66:653 years preceding the survey.194 Seasoned service members and officers are also expected to change locations frequently. Seventy-six percent of enlisted personnel with seven to ten years of service reported moving three or more times.195 For officers, this figure rose to 82%.196 “For those with more than fourteen years of service, 40% of enlisted personnel and 55% of officers reported more than nine moves.”197 Moreover, because there are often waiting lists for military housing, many transfers involve two moves: one into a temporary private rental home and a second move into less expensive military housing when it becomes available.198 Because of security and training needs, military posts are also often in isolated locations far from mainstream civilian institutions. Even when stationed at bases located in large metropolitan areas, service members face significant emotional and cultural barriers which prevent them from developing a sense of community with nearby civilians.199 Moreover, many may be hesitant to integrate into civilian communities because they move so frequently.200 Accordingly, military members are often reluctant to engage in, and are slow to be recognized by, local democratic institutions.201 Low voter registration and participation rates of military personnel may make local leaders less responsive to financial hardship suffered by soldiers at the hands of politically aggressive local merchants.202 Many military personnel also report outright tension between service members and civilians who live near military posts.203 Overseas 194 Zahava D. Doering & William P. Hutzler, Description of Officers and Enlisted Personnel in the U.S. Armed Forces: A Reference for Military Manpower Analysis 161 (1982).

195 Segal, supra note 193, at 17.

196 Id.

197 Id. (citing Doering & Hutzler, supra note 194).

198 Id. at 22.

199 Martin & Orthner, supra note 5, at 175.

200 For example, Buddin has found that military members living in military housing typically have higher use rates for military family support and recreation programs and may integrate into surrounding communities slowly. BUDDIN, supra note 4, at 73.

201 LUTZ, supra note 5 (discussing weak local democratic culture from low voter registration and participation around Ft. Bragg).

202 Id.

203 One soldier explained:

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assignments not only create geographic isolation, but also place service members and their families in foreign and sometimes resentful cultures.

These geographic mobility issues dislocate military personnel from their extended families, which can erode their ability to bridge unexpected expenses and income shocks.204 When a car breaks down, siblings, parents, or long-time friends may not be available to assist with temporary transportation. When a child is ill, or when work requires long hours, grandparents may not be close by to provide free child care. Geographic separation is especially difficult for young enlisted personnel and their spouses, many of whom are away from their families and long-time friends for the first time.205 There may be less incentive to invest in new friendships and long-term support networks, since these relationships are likely to be severed when the service member is next transferred.206 Geographic constraints placed on military families also create a significant earnings penalty for the spouses of service members. Although 60% of military spouses work outside the home, they suffer disruption to their careers when the family is forced to relocate. And, because bases are typically in isolated locales which often have depressed economies, there are often few employment prospects for spouses.207 The military does provide spousal employment services, which aim to help spouses adjust financially to relocation;208 however, service members rated this service dead last in user satisfaction among all military community and family support programs.209 Studying this phenomenon in over 18,000 military personnel observations, Payne, Warner, and Little found that three-year rotations caused a 40% decrease in the income that a spouse would have earned had he or she been able to remain at one location for six years.210 Recognizing these facts, many military families end up foregoing human capital investments for military spouses because education, training, and occupational experience are less likely to yield returns in the long run.211 This suggests another risk factor for debt problems because a second income is an GOTTLIEB, supra note 156, at 60.

204 HARRELL, supra note 5, at 108–09.

205 Segal, supra note 193, at 17–18.

206 Id. at 18.

207 HARRELL, supra note 5, at 108–09.

208 BUDDIN, supra note 4, at 51–52.

209 Id. On a five-point scale, respondents gave military spouse employment services an average score of 2.88. Id. at 51. In comparison, the highest-rated service was chaplain services, rated at 4.12. Id.

210 Deborah M. Payne, John T. Warner & Roger D. Little, Tied Migration and Returns to Human Capital: The Case of Military Wives, 73 SOC. SCI. Q. 324, 328, 337 (1992).

211 Id. at 325.

684 OHIO STATE LAW JOURNAL [Vol. 66:653 important hedge for income shocks and sudden expenses.212 When one partner suffers a setback, the other can take up the slack to avoid reliance on creditors.

Spouses of military personnel are comparatively less able to do this because of the demands placed on military families.

Frequent moves also prevent military members from reaping many of the benefits of home ownership. This is important because family homes are often the most important device for accumulating and stabilizing wealth in the American middle class. Unlike other common middle- and lower-class physical assets, such as automobiles, homes generally appreciate in value over time, giving their owners an investment return. Home mortgages are also forced savings mechanisms which discipline families. As homeowners pay down their mortgages, they accumulate equity in a valuable asset, which they can leverage to obtain low-cost financing. Low-cost home mortgages are a valuable tool in overcoming income shocks and unexpected expenses without relying on highcost lenders. Similarly, when long-time homeowners suffer a permanent decline in income from illness, divorce, retirement, or job loss, they have the option of selling their home to create a pool of liquid funds with which to restart their financial development. Professor Dalton Conley has argued persuasively that home ownership is also the most important asset in promoting long-term intergenerational transfer of wealth from parents to their children.213 Because military families move frequently, it makes less sense for them to invest in purchasing a family home.214 Most financial planners advise that realtor commissions, mortgage loan closing costs, and large interest payments at the beginning of a mortgage loan term eliminate the financial benefits of home ownership for families that plan to own a home for fewer than three years.

Moreover, those military families who do end up staying in one location long enough to make home ownership feasible will not usually know this ahead of time. The result is that many military families are forced to rent their homes, either in fact (from a landlord) or in effect (from the real estate sales and finance industry costs). Military housing or housing allowances offset missed home ownership to a degree, but these substitutes do not create investment returns, forced savings, low-cost borrowing opportunities, or intergenerational wealth transfer effects.215 Moreover, service members have given these benefits and services low marks, complaining of long waiting lists, poor distribution of information, and poor quality housing stocks.216

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Military attitudes toward financial problems may facilitate predatory lending to enlisted personnel. The military, both as a matter of policy and institutional culture, steadfastly refuses to allow service members to avoid financial obligations.217 While this policy is certainly laudable in most contexts, such as child support or tax obligations, it may be more problematic in the context of predatory lenders. The institutional demand that service members have their financial affairs in order is backed up with the very real threat of reprimand, loss of security clearances, bar to re-enlistment, denial of promotion, court martial, and dishonorable discharge.218 “Soldiers are required to manage their personal affairs satisfactorily and pay their debts promptly,” explain Army regulations.219 “Failure to do so damages their credit reputation and affects the Army’s public image.”220 Thus, military service members who do not pay their bills are often subject to intense pressure from their commanding officer.221 Where many working-class Americans might simply refuse to pay an overreaching lender, service members may not have this option. We should also expect that bankruptcy is a less realistic option for most military personnel.

Where civilians might be able to defeat over-reaching unsecured creditors by filing a Chapter 7 bankruptcy petition, many in the military might simply refuse to entertain this possibility.

217 Alan L. Cook, The Armed Forces as a Model Employer in Child Support Enforcement: A Proposal to Improve Service of Process on Military Members, 155 MIL. L.

REV. 153, 168–69 (1998).

218 Id. at 169 n.103; CBSNews.com, supra note 10. For example, the Navy Military

Personnel Manual states:

Members of the Naval service are expected to pay their just debts and financial obligations in a proper and timely manner.


The way in which one handles their private financial affairs provides a reliable indication of their general character and trustworthiness.


Failure to pay just debts... is evidence of irresponsibility and may jeopardize their security clearance status, advancement status, duty assignment, qualification for reenlistment or extension of enlistment, retention, and in aggravated circumstances may become grounds for disciplinary and/or administrative separation action.

NAVY MILITARY PERSONNEL MANUAL 7000-020 (2005), http://buperscd.technology.navy.mil/bup-updt_CD/BUPERS/MILPERS/Milpers.pdf.

219 Indebtedness of Military Personnel, Army Regulation 600-15, at 1-5a (1986).

220 Id.

221 Edward Robinson, Big Banks Fuel Growth of Payday Lenders, TENNESSEEAN.COM, Nov. 29, 2004, http://www.tennessean.com/business/archives/04/11/62129411.shtml (sergeant discussing discharge of soldiers from debt defaults).

686 OHIO STATE LAW JOURNAL [Vol. 66:653 This military cultural commitment to financial responsibility also helps ensure that military personnel are relatively easy to track. For some high-cost lenders, the possibility that the debtor may simply skip town or disappear is one of the greatest risks of doing business. High-cost creditors often employ skip tracing departments and private investigators to track down delinquent debtors.

Creditors also face difficulty in delivering service of process on elusive civilian borrowers delaying judicial collection proceedings. Some civilian debtors can obtain an informal “discharge” of their debts by simply disappearing. In comparison, the military maintains a system for locating their service members.

Importantly, the military has a defined and mechanical system where it actively assists companies and individuals seeking to serve process on military personnel.222 The military culture and policies dealing with financial obligations make it relatively more difficult for military personnel to escape their financial past.

This fact should make military borrowers a better credit risk which, given efficient price competition, could encourage lenders to pass on lower prices. But it also probably encourages targeting of military service members by lenders who specialize in extending onerous loans to uninformed and overextended borrowers. Predatory lending is, above all, a collection business. Unsecured predatory lenders do not attempt to compete by offering lower prices than their competition, but rather by extracting debts others cannot. The military insistence on repayment under all circumstances may simply assist predatory lenders in making and enforcing questionable loans. Unlike the civilian marketplace, creditors specializing in loans to military personnel can expect a free and effective built-in pressure and tracking network to assist them in forcing payment.

C. Payday Lending to Military Personnel

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