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Protecting those who serve
September 2006 | Volume 42, Issue 9

Route 40 in Camden County, Georgia, leads directly to the Kings Bay naval submarine base. The route features the standard assortment of strip mall commerce—restaurants, supermarkets, department stores, and gas stations—and base workers and their families conduct virtually all of their everyday business there.

The area is also packed with businesses not found in many communities. On this one road near this single base, a slew of establishments offer payday and tax refund loans, auto title pawns, and other purported quick and easy means of access to cash.

These businesses are familiar fixtures in low-income communities, and many military families qualify as low-income. Nearly 73 percent of all active-duty military personnel fall within the six lowest income ranks, for which salaries barely top $30,000 a year and generally hover around $20,000.¹ The ubiquity of these businesses around military bases is something that might shock even residents of other low-income communities. Yet military families in all service branches confirm that the businesses near the Kings Bay base are typical of those in neighborhoods near military installations where they’ve served.

Businesses with a history of running consumer scams target active-duty military men and women every day, both in and out of military installations. Retired and disabled veterans are exploited by exceptionally costly scams intended specifically for them.

Consumer scams aimed at members of the military are particularly heinous because they prey on special vulnerabilities that arise from the commitment military men and women make to serve in defense of our country. Predatory consumer practices targeting the military must be halted not only because they are unfair and possibly illegal, but also because they pose a threat to national security by undermining the strength, focus, and readiness of our military forces. Victims may have legal claims and remedies.

Typical scams

The number and variety of fast-cash scams perpetrated on current and former military personnel seem limited only by the imaginations of the scammers themselves. Among these are fast-cash lenders, unethical car dealers, Internet services companies, catalog merchandisers, phone card sellers, rent-to-own companies, and benefits buyout lenders.

Fast-cash lenders. Most of these businesses operate similarly, lending small amounts of cash for short periods of time at exceedingly high interest rates. While borrowers start out intending to repay quickly, they often find themselves buried under triple-digit annual percentage rates, unable to pay back the growing debt for months or even years.

Many of these businesses take postdated checks to be cashed on the borrower’s next payday or require electronic access to a borrower’s bank accounts for payment purposes. Some lenders soft-pedal high interest rates that they are legally required to disclose by making claims such as, “The form says 520 percent a year, but you’re only borrowing for two weeks, and it’s only 20 percent for two weeks.”

“Title pawn” lending is a form of short-term loan usually offered for amounts no more than one-quarter of a car’s worth—for which the car’s title is used as collateral. Interest rates are very high, and many cars are lost for borrowed amounts that represent only a fraction of the vehicle’s value.

Unscrupulous car dealers. Car scams are a big source of financial trouble for military people. “Buy here/pay here” used-car dealers sell old, used cars for large down payments that often equal the car’s value plus a biweekly payment plan for the rest of the sales price. When the car breaks down, the payments stop, and the car is repossessed and sold again.

With “spot delivery” or “yo-yo” sales—a bait-and-switch tactic—the dealer contacts the purchaser after he or she has bought the car and signed the finance agreement, claiming that there is some problem with the buyer’s credit. To keep the car, the buyer must agree to a higher interest rate or down payment, or both. If a trade-in is involved, the buyer often learns that the trade-in vehicle was sold and cannot be recovered, after which the dealer offers the buyer the option of losing the value of the trade-in to keep the remaining terms of the original deal.

Internet service companies, catalog merchandisers, and phone card sellers. Deals offered by these companies are often thinly disguised forms of high-priced lending. The point is to “hook” victims and create the pretext that they are getting something of nominal value even though they could easily obtain it elsewhere for a fraction of the cost and without onerous loan provisions.

Some Internet service sales involve an instant cash rebate given in exchange for Internet access. For instance, a $480 “rebate” is offered with the purchase of one year of service, costing $80 every two weeks for only eight hours of service during that period. Essentially, the company is offering to lend the borrower $480 for twelve $173.33 monthly payments at an annual interest rate of 421.6 percent.

With catalog sales, the borrower usually tenders a postdated check for a certain amount in exchange for cash and coupons that are redeemable for catalog items. A soldier might write a postdated check for $575 in exchange for $500 cash and $75 worth of coupons. However, the coupons are rarely if ever redeemed since the catalog goods are usually worthless, overpriced, or undesirable. The scammer pockets the “value” of the coupons.

Phone card scams typically involve the exchange of phone service for an instant cash rebate. One such offer might involve a $300 instant cash rebate for purchasing 300 minutes’ worth of long-distance phone time twice a month for a year at a cost of $135 a month. A similar loan for $300 triggering $135 monthly payments for a year would carry an interest rate of 533 percent.

Rent-to-own companies. Military personnel rely heavily on rent-to-own businesses because they move frequently and need the appliances and furniture that these dealers lease to people who can’t pay cash or obtain market-rate credit. Customers who rent long enough to assume ownership often end up paying two to three times the retail price by the time they’ve stopped renting. Many customers never assume ownership and only rent at what turn out to be exceptionally high rates.²

Benefits buyout lenders. In the world of “advance funding” or benefits buyouts, lump-sum payments are offered to veterans in exchange for streams of their benefits, which often represent a lifetime of work. This scam, which can cost individual veterans tens of thousands of dollars, is drawing scrutiny from Congress and cries of alarm from veterans’ groups.³

In a typical buyout, a veteran receiving monthly cash benefits is pitched a quick cash infusion by a private lender that offers money in exchange for a fixed stream of the veteran’s retirement or disability payments. However, the lump sum is often a horrible deal, paying just a few dimes on the dollar.

Advance funding Web sites may feature American flags, full-color displays of military insignias and other symbols, and text that specifically appeals to veterans in need of extra cash. The hints of military affiliations are unmistakable, and messages are couched in the language of economic empowerment. Consider the following real-life examples of typical buyout program provisions offered to veterans on the Internet and elsewhere:

A veteran receives about $66,100 ($80,000 loan minus $10,000 broker’s fee and $3,900 insurance premium) in exchange for 10 years’ worth of monthly benefits (96 months at $2,195 a month and 24 months at $1,207 a month); additionally, the veteran must pay a $110 monthly management fee plus $439 a month into a “pooled investment” fund that may not be returned once the loan is paid. The result is a $66,100 loan at a 49.15 percent annual percentage rate (APR), costing $302,928 in payments.⁴

A veteran receives $6,000 initially and then, at the lender’s option, two separate loans for an additional $13,500. The loans carry APRs of 104.21 percent, 92.22 percent, and 79.82 percent. Ultimately, the veteran will receive $19,500 but have to pay back $36,637.92.⁵

Veterans’ benefits buyout arrangements may violate existing federal law prohibiting the assignment of veterans’ benefits. The lenders also may be violating state unfair and deceptive arts and practices (UDAP) laws and usury statutes.

The Truth in Lending Act requires lenders to make certain disclosures so that consumers can make informed decisions about the cost of credit. But benefits buyout lenders try to avoid providing required disclosures by referring to the buyouts as something other than loans. For example, one contract explicitly states “this is not a loan,” while another characterizes the transactions as a purchase.⁶ Courts often see through the smoke screen and apply consumer credit laws to such transactions, regardless of how the lenders characterize them.⁷

Veterans’ benefits buyouts have attracted substantial congressional attention. In 2002, the Senate passed legislation, introduced by Bill Nelson (D-Fla.) and cosponsored by John McCain (R-Ariz.), that would ban the practice of assigning veterans’ benefits by making it punishable by stiff fines and jail time. Despite a high level of interest in the House, the assignment provision was withdrawn from the bill.⁸

In 2005, Rep. Sam Graves (R-Mo.) introduced H.R. 97 to bar creditors from applying an annual percentage rate greater than 36 percent on credit extended to active military personnel. Designed to amend the Servicemembers Civil Relief Act, the bill would require mandatory loan disclosures of key terms and obligations, bar creditors from renewing credit with the proceeds of other credit extended to the servicemember, and impose criminal penalties and fines for violations.

Easy targets

Consumer predators target military communities because they share certain characteristics that make them especially vulnerable to credit and other consumer scams. These include

• greater-than-average numbers of economically unsophisticated young adults, away from home for the first time and anxious to experience new things
• a working population that universally receives U.S. government paychecks on a rock-solid schedule, is in no danger of being laid off, and is easy for debt collectors to track
• a military culture that urges people to keep their finances in order as part of good-conduct codes
• large numbers of newly married couples, often with young children, who are under intense economic pressure to make ends meet.

Retired Navy Captain Bill Kennedy, who heads Naval Station Mayport’s branch of the Navy-Marine Corps Relief Society, says many young military people walk a razor-thin economic line:

An E-3 [one of the enlisted ranks], married with one child, after base pay and other allowances has no money left at the end of the month. Zero. There’s no money for restaurants. No money to go to a movie or buy presents. A car repair or even a little mismanagement can wreck ’em. And the reason these businesses target the service member—and they won’t say this—is they know what the pay is. And they know that, no matter what, those kids are paid on the 1st and 15th of every month, and they’re not going to be laid off. They’re easy targets.⁹

Easy targets for the signs emblazoned across storefronts that military people drive by countless times as they enter or exit a military installation—signs that typically read: “$500 instant cash—no credit check,” “Make your next payday today,” or “Instant money.”

Ads for fast cash and easy loans that appear in the Army Times, Navy Times, Air Force Times, and Marine Corps Times are more insidious lures. Although these newspapers are independently published, many service personnel believe the papers are “official” military publications and assume that their ads have been vetted to screen out undesirable businesses.

Many consumer predators exploit servicemembers’ concern about maintaining orderly personal finances. Creditors often report signs of financial trouble to commanding officers. Florida Legal Services attorney Lynn Drysdale says that her military clients are “sitting ducks for bill collection” because they’re easy to track and anytime they fall behind on their debts, a creditor or debt collector can contact their commander.¹⁰

What many military men and women don’t realize is that isolated incidents of financial trouble almost never trigger military discipline. Yet some creditors work hard to create the opposite impression. For example, some loan contracts prominently mention possible punishment. One actual “Repayment Agreement” document states:

If I fail to provide these funds, I understand that this will be a violation of Articles 123a and 134 of the UCMJ [Uniform Code of Military Justice], punishable by up to six months’ confinement, forfeiture of all pay and allowances, and a bad-conduct discharge. . . . I authorize the [creditor] to contact my military superiors in these matters.¹¹

Such contractual provisions anger Retired Admiral Jerome Johnson, former president of the Navy-Marine Corps Relief Society, which helps many service personnel ensnared in consumer scams. Although financial problems could trigger action by superiors, Johnson said discipline is unlikely except in the most serious repeat-offender cases. Most troubled military personnel are referred for financial counseling or legal help.

The regular upheavals of military life also can spring financial traps leading to consumer scams. Times of deployment, like the recent call-ups for the war in Iraq, can be especially vulnerable moments for lower-income military families. During these high-stress times, military personnel may need to spend extra money to purchase necessities required for departure. With deployment, a departing servicemember may leave financial matters in the hands of a spouse not normally in charge of finances, who may not manage them well.

Many private companies target military personnel by using what marketing experts call “affinity marketing”: To attract active-duty military and veterans, businesses use company names that imply a military connection and may use former servicemembers as company principals or high-visibility representatives. These connections are exploited to market goods and services of high cost and questionable utility to military people.

Air Force Colonel Marcus Beauregard, who oversees a financial literacy program at the Pentagon, received a report from commanders at Lackland Air Force Base in San Antonio, Texas, about insurance salespeople, many of whom are former military personnel. Because on-base solicitation rules ban salespeople from bases, they station themselves along San Antonio’s popular Riverwalk, a magnet for tourists and off-duty military. Young servicemembers can be easy to spot even in civilian clothes, and salespeople with military experience easily strike up conversations with them.

“They come across with a whole lot of authority,” Beauregard said.¹²

The bogus comradeship’s real purpose is to sell whole-life insurance policies at premiums of $100 to $125 per month. The policies are real, but often they are unnecessary because all military members have access to government-sponsored Servicemembers’ Group Life Insurance (SGLI) coverage for about $12 per month.

Although whole-life insurance plans have a savings component that the SGLI does not, the higher-priced policies aren’t necessary for young people who already can obtain good term life insurance coverage. However, many service members who have SGLI purchase these overpriced policies because someone with credibility convinces them it is a way to save or invest their money.

Combating abuses

State attorneys general and private lawyers can do more to fight scams targeting the military. Attorneys general, especially in states with a large military presence, should increase enforcement of state UDAP provisions and other laws. As a component of effective law enforcement, more private legal actions challenging scams that violate UDAP standards, Truth in Lending Act provisions, state and federal usury laws, and other mandates are needed.

For the private practitioner, representing military personnel is not unlike representing any other client with a consumer problem, but there are key differences to keep in mind. Despite their special vulnerabilities, military personnel also have special protections that are unavailable to their civilian counterparts. Attorneys should use these resources when representing military clients.

Judge Advocate General’s Corps. In addition to providing legal services to military personnel on consumer matters, judge advocates may offer valuable assistance to personal injury lawyers handling cases involving predatory consumer businesses. Consider asking judge advocates to take part in discussions with the predatory business—their involvement has sometimes resulted in the voluntary rescission of onerous consumer contracts affecting the military. At the very least, judge advocates can be an important source of information on all things military.

Federal anti-assignment laws. Various federal laws prohibit enlisted personnel and veterans from assigning their pay or benefits. One statute prohibits enlisted members of the Army, Navy, Air Force, and Marine Corps from assigning their pay; if they do so, the assignment is considered void.¹³ Retirement pay is considered pay.¹⁴

Another provision bars the assignment of veterans’ disability benefits, which are exempt from taxation and creditors’ claims and cannot be attached, levied, or seized under any legal or equitable process before or after the veteran receives them.¹⁵ Another states that any agreement whereby the veteran transfers the right to receive payment of disability, pension, or dependency and indemnity compensation is considered an assignment and is prohibited.¹⁶ Similarly, any such agreement for collateral for security is also prohibited and void from its inception.¹⁷

Servicemembers Civil Relief Act (SCRA). Passed in 2003 to update and strengthen the 1940 Soldiers and Sailors Civil Relief Act, the SCRA aims to temporarily suspend civil proceedings that may adversely affect active-duty military personnel in the Army, Navy, Air Force, Marine Corps, and Coast Guard.¹⁸ The act endeavors to strengthen the national defense by allowing servicemembers to “devote their entire energy to the defense needs of the nation.”¹⁹

Generally, the act offers relief to servicemembers from a variety of obligations and penalties imposed by rental contracts, installment contracts, mortgages, life insurance policies, and personal and property taxes. For example, if a soldier’s rent does not exceed a statutorily determined amount, landlords may not distress the soldier or his or her dependents or evict them from their residence without court approval.²⁰

Any debt incurred by a servicemember—or jointly by a servicemember with a spouse—before entering the military cannot carry an interest rate greater than 6 percent during military service. To trigger the rate reduction, the servicemember must provide written notification to the creditor, along with a copy of his or her official call to service.²¹

Active-duty personnel are also protected from rescission or termination of a contract for the purchase or lease of real or personal property if a breach of contract occurs before or during that person’s military service; property may not be repossessed without a court order.²² No sale, foreclosure, or seizure of real or personal property secured with a mortgage, trust deed, or other comparable security will be considered valid if made during or shortly after the service member’s period of military service except on court order or if he or she signs a written agreement waiving such protection.²³

These are just some of the protections available under the SCRA. Attorneys who represent military personnel should be familiar with all the safeguards the act affords.

Both active-duty and retired servicemembers face severe and debilitating consumer problems. Military men and women who defend our country should not also have to defend themselves from exploitation within our borders. Allowing predatory lenders to continue to prey on military personnel threatens our nation’s safety and is a transgression of justice.²⁴

Stuart Rossman is the director of litigation at the National Consumer Law Center in Boston.

Hellen Papavizas a student at Northeastern University School of Law, served as an intern at the center. This article updates and expands a center report by Steve Tripoli and Amy Mix, In Harm’s Way—At Home: Scams and the Direct Targeting of America’s Military and Veterans (May 2003). © 2006, National Consumer Law Center.

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Notes

1. DEP’T OF DEF., ACTIVE DUTY MILITARY PERSONNEL BY RANK/GRADE, MAY 31, 2006, available at http://siadapp.dior.whs.mil/personnel/MILITARY/rg0605.pdf (last visited July 26, 2006).

2. For an example that results in a 250 percent APR, see Lynn Drysdale & Kathleen E. Keest, The Two-Tiered Consumer Financial Services Marketplace: The Fringe Banking System and Its Challenge to Current Thinking About the Role of Usury Laws in Today’s Society, 51 S.C. L. REV. 589, 615 (2000); see also James Lacko et al., Fed. Trade Comm’n, Survey of Rent-to-Own Customers (Apr. 2000), available at www.ftc.gov/reports/index.htm (last visited July 26, 2006).

3. Disabled Veterans of America, Vietnam Veterans of America, AMVETS, and Paralyzed Veterans of America back new legislation explicitly banning this practice, according to U.S. Sen. Bill Nelson’s (D-Fla.) office.

4. STEVE TRIPOLI & AMY MIX, IN HARM’S WAY—AT HOME: SCAMS AND THE DIRECT TARGETING OF AMERICA’S MILITARY AND VETERANS 27 (May 2003).

5. Id.

6. Id. at 28; see also Henry v. Structured Investments Co., No. 05CC00167 (Cal., Orange County Super. Ct. filed Aug. 4, 2005); Amos v. Advanced Funding, Inc., No. 04-CV-02911-WBH (N.D. Ga. filed Oct. 5, 2004).

7. See, e.g., Dorfman v. Moorhous, 108 F.3d 51 (4th Cir. 1997); In re Price, 313 B.R. 805 (Bankr. E.D. Ark. 2004); In re Bowden, 315 B.R. 903 (Bankr. W.D. Wash. 2004).

8. S.2003, 107th Cong. (2002).

9. TRIPOLI & MIX, supra note 4, at 10-11.

10. Id. at 13.

11. Id. at 47.

12. Id. at 18.

13. 37 U.S.C. §701(c) (1996). This provision automatically applies only to enlisted members of the military. Commissioned officers may assign their pay subject to regulation, though no regulations have been promulgated thus far. Id. §701(a).

14. 37 U.S.C. §101(21) (2006).

15. 38 U.S.C. §5301(a)(1) (2003).

16. Id. §5301 (a)(3)(A).

17. Id. §5301 (a)(3)(C).

18. 50 U.S.C. app. §501 (2003).

19. Id. §502(1).

20. Id. §531.

21. Id. §527.

22. Id. §532.

23. Id. §533.

24. See also Steven Graves & Christopher L. Peterson, Predatory Lending and the Military: The Law and Geography of “Payday” Loans in Military Towns, 66 OHIO ST. L.J. 653 (2005).

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