(Rev March 2008)
Secretary of Defense Policy and Predatory Lending
Marine Corps Installation (East) Predatory Lending Policy
II. Payday Lending
Typical Payday Loan Scenario
Legality of Payday Loans
Payday Loan Disguises and Evasions
Internet Evasions and “out of state” Transactions
False Statements under the MLA
III. High Interest, Short Term, Personal Loans
High Interest Rates
Credit Life Insurance
Disability Loan Insurance
Collateral and Collateral Insurance
Additional Predatory Lending Red Flags
Pretended Affiliation with the Navy, USMC, or DoD
Giving Account Information
Disconnect Between Sales Pitch and Written Contract
IV. Car Title Loans
V. Seller Financed Transactions
VI. Refund Anticipation Loans
RALs Gone Bad
VII. Vehicle Purchase Loans
Monitoring and Cleaning Up Your Credit
Importance of Credit Monitoring
Free Credit Reports
Shop Around for a Good Loan
Deceitful, unfair practices associated with vehicle financing
Yo Yo Sales
Bait and Switch Financing
Fraudulent Financing Applications
Interest Rate Mark Up
VIII. Debt Collection Practices
Federal Debt Collection Law
State Debt Collection Law
Marine Corps Debt Collection Policy
Standards of Fairness
Communication of Debt Information to Commanders and Other Third Parties
Processing Complaints of Indebtedness
Zombie Debt Collectors
IX Conclusion: Actions and Reactions
Reactions / Threat Assessment
1. Month after month, year after year, we at the legal assistance office see it happen; Marines and their families don’t get as much for their hard earned dollars as they should. The largest rip-offs often involve a loan. Service members fall prey to predatory loans of different types: payday loans, refund anticipation loans, seller financed loans of items such as computers or furniture, high interest personal loans, and, of course, all sorts of awful loans related to the purchase of motor vehicles. Impulse buying, ignorance of the law and lending practices, and deceitful sales practices all play a part in this financial carnage. Sometimes, when the money doesn’t stretch far enough to cover all the bills, Marines try to fix their finances by getting a payday loan or other high interest loan-which only makes the problem worse. The chain of command can assist service members to deal with financial hardship and can provide appropriate referral to other helpful agencies, including the Navy and Marine Corps Relief Society, Legal Assistance Attorneys, and the installation MCCS financial consultant and his staff.
2. Secretary of Defense Policy and Predatory Lending. Through the Military Lending Act (MLA) [10 U.S.C. 987] Congress gave the Secretary of defense sweeping new authority to regulate loans made to service members and their dependents. The Secretarial implementing regulation [32 CFR 232] used this authority sparingly, outlawing payday loans, refund anticipation loans, and car title loans when made in excess of thirty six percent annual interest rate. Loans made in violation of the Regulation are void and of no effect; lenders who knowingly violate the Regulation commit a Federal misdemeanor, punishable by a fine and up to a year in prison.
3. Marine Corps Installations (East) Predatory Lending Policy. On 16 October 2007, the Commanding General, Marine Corps Installations (East) issued policy guidance concerning predatory lending and how to combat it [MCIE Policy Letter 007-07]. While the Secretarial Regulation contains criminal sanctions, it is fairly narrowly focused on which types of loans are covered. On the other hand, MCIE Policy applies to a broader range of practices and emphasizes preventative consumer education and internal, administrative actions. MCIE Policy recognizes that a variety lending practices, including some which may not be covered under the Secretarial Regulation, can harm service members and their dependents. Therefore, in accordance with MCIE Policy, predatory loans include, but are not limited to: (a) all payday loans, regardless of the interest rate (b) all car title loans, regardless of the interest rate (c) all refund anticipation loans, regardless of the interest rate, and (d) all loans with an effective interest rate exceeding 36%. Leaders are urged to report these and any other oppressive lending practices to proper military authorities. MCIE facilities and publications will not be used to support predatory loans or predatory lenders. In appropriate cases, action may be taken to place predatory lenders off limits to military personnel. One of the prime means of combating predatory lending is to prevent it through the education of our commanders, their staffs, and our service members and dependents. This web posting supports that educational effort.
1. General Information. Here’s how payday loans work. For a hefty fee, the payday lender cashes your check and agrees not to present it to your bank for payment until your next paycheck. This is not a fix that works. If you are going to the payday lender for cash to make ends meet, the payday loan-a loan with an interest rate that may be as high as three hundred and ninety percent or higher-is far more likely to be a self-inflicted wound than the solution to your financial problems. Furthermore, many of these payday loan operations require you to give the lender access to your bank account by means of a check or routing number or some special permission to debit your bank account. Giving this ability to a creditor to raid your account can be just as big a problem as the high interest loan itself. If you are even considering going to the payday lender to pay your bills, you have a serious problem, and the sooner you recognize it the better.
2. Typical Payday Loan Scenario
a. Lance Corporal Jones rents a house he can barely afford, and then he gets talked into buying a household full of expensive furniture and a computer and other consumer electronics, all on credit. He buys a car he can't afford that has no warranty, financing the deal at over twenty percent interest. He spends too much money on fast food and personal entertainment. He has no idea how much he spends a month, and one day he finds that he doesn't have enough money to pay all his bills. He starts making monthly installment payments late and sometimes not at all. The furniture and electronics sellers threaten to sue him and harm his credit. They threaten to tell his command that he’s a deadbeat. Maybe that car he bought breaks down and needs to be repaired. The landlord threatens to evict him; the auto financer threatens to repossess his car.
Instead of taking advantage of free MCCS financial consult available,
Instead of seeking assistance from Navy and Marine Corps Relief,
Instead of getting a free and confidential legal assistance consult to learn his legal rights,
Instead of exploring other lower cost financing that may be available,
Instead of doing anything that might actually help, Lance Corporal Jones panics and goes to a payday lender. With no money in his account, he writes a check for $300 to the payday lender. In exchange, the payday lender promises to delay presenting that check to Jones' bank for two weeks, or until Jones' next payday. For this two week loan, the payday lender charges fifteen percent of the face amount of the check, or $45. Figured as an annual percentage, that comes out to 390% interest!
Three hundred and ninety percent interest!!!
b. Lance Corporal Jones has just made his financial situation worse by adding another $45 to his bills. He can’t even pay all the bills he already has, let alone an additional $45. Even worse, experience shows that Lance Corporal Jones will probably take out another payday loan to pay off the first one. And he will do it again when the bills come due the following month. And so on and so on. Lance Corporal Jones may become a credit junkie, coming back over and over again for his quick fix of payday loan cash, in a death spiral of additional debt and borrowing. In the long run, the payday loans crush whatever chances our hypothetical LCpl Jones may have had of straightening out his finances, so he gets evicted and his car gets reposed and his credit is destroyed anyway.
3. Legality of Payday Loans. You may be asking yourself, how can such incredibly high interest rates be legal? Often, they’re not. Some states, including North Carolina and Georgia, make payday loans illegal. Further, the Federal Military Lending Act [10 U.S.C. 987] and its implementing regulation issued by the Secretary of Defense [32 C.F.R. 232] makes it illegal nationwide to issue such short term, high interest payday loans to service members or their dependents.
4. Payday Loan Disguises and Evasions. Because payday loans are illegal in some states and are unlawful nationwide when offered to service members and their dependents, purveyors of payday loans attempt to dress up their product so that it appears to be something that it is not.
a. Sham Purchases. One attempted evasion is to pretend that the payday loan is not really a loan at all, but is rather a purchase of some product. For example, the payday lender may sell you catalog coupons or phone cards or some other small item at the same time he makes you a payday loan. In a typical transaction, the lender requires you to purchase a $15 phone card for $30. In addition, he requires you to purchase the card with a $100 check. Or you may be required to give the lender the ability to take money out of your bank account. If you want two phone cards, you pay $200, three cards, $300, and so on. The lender agrees not to cash the check or to draft your account until your next payday. Although the lender will claim that this is not a loan at all, it is essentially a payday loan, except that in addition to exorbitant interest, you also have to buy an overpriced phone card or worthless coupon that you didn’t want as well. It’s a payday loan, thinly disguised to look like a sale of a coupon or phone card.
b. Internet Evasions and “out of state” transactions. Other payday lenders have gone to the internet, or take other steps in an attempt to evade your state’s consumer protection laws. Sometimes the payday lender uses a combination of brick and mortar store as well as the internet. You enter their sales office and are asked to sit down at an internet terminal. The payday lenders (and sometimes other lenders as well) may ask you to claim some phony, out-of- state residence on your loan application, or make you sign some document saying that the transaction is occurring in some other state with lax consumer protection laws, or that the law of some other state applies- probably Nevada, which has no interest rate cap. For years, payday lenders attempted to evade state regulators by claiming that their affiliation with some out of state bank shielded them from state scrutiny. That supposed justification has come under considerable fire from courts, banking commissions, and state attorneys general. Some payday lenders have attempted to enter into agreements with Native American tribes in a new attempt to avoid state regulators. With the opportunity to earn 400% interest and higher, you can be sure that payday lenders will continue to dream up ingenious schemes in an ongoing effort to avoid state regulations.
c. False Statements under the MLA. Do not be surprised if payday lenders suggest that military borrowers fraudulently state that they are not active duty military or dependents, an obvious attempt to evade the civil and criminal sanctions of the Federal Military Lending Act.
High Interest, Short Term Personal Loans
1. General Information. Payday loans are by no means the only type of high interest, predatory loan to watch out for. In fact, in many places, state and Federal enforcement agencies have all but wiped out payday lending. Instead, you see the phenomena of high interest personal loans, especially catering to junior active duty service members. These institutions will loan $500 to $3,000 to service members with high interest rates as well as hefty fees. The debtor is required to pay back the loan over six to twelve month period. And there are often additional, costs. The lender may require that all of these dubious add-ons be financed at the same high interest rate as the original loan. When all these junk fees are added in, the effective interest rate of the loan may be significantly higher than the rate listed on the contract and may well exceed the state’s interest rate limit. These are some of the features to watch out for in this type of loan:
2. High Interest Rates. Interest rates will often hover around 36%, or whatever the highest rate allowable in that state. Some of these lenders, like the payday lenders, will encourage you to make the loan over the internet, or to sign a contract or statement acknowledging that the loan is being made in some other state, one with anti-consumer laws and no interest rate caps. Their tactics are used to allow them escape state usury laws and charge 50 percent, 60% interest rates or higher.
3. Credit Life Insurance. The lender may then tell you that, since you may die in the six or so month period of the loan, you have to buy a credit life insurance policy from the lender. With a credit life plan, the only thing your premiums buy is a policy that pays off the loan in the event that you die before the end of the loan term. Be especially wary of a lender that, on the one hand, refuses to give you a loan unless you purchase a credit life policy, but on the other hand wants you to sign a statement acknowledging that your decision to buy the policy was completely voluntary. In fact, that is a common theme with many types of consumer frauds and rip-offs, a disconnect between what the seller says and what the contract reads. The legal assistance office has also seen lending contracts that call for the debtor to buy what is essentially a credit life insurance policy, except that the contract attaches some different label to the product. Such contracts then go further and require the debtor to acknowledge that the credit life policy -that is being called by the contract some other name- really isn’t a credit life policy.
4. Disability Loan Insurance. The lender may also say that you could become seriously injured during the loan period and lose your ability to pay off the loan. You are therefore required to purchase additional insurance to cover such disability, generally financed at the same ridiculously high rate as the rest of the loan.
5. Collateral and collateral insurance. Another red flag is a lender who requires you to identify some collateral to pledge against the loan. Collateral insurance is different than the common purchase money security instrument situation; for example, when you sign a loan to buy a car, the loan document says that the lender can repossess the car if you don’t pay. No, collateral insurance red flag situation is when the lender asks you to pledge collateral that is completely unrelated to the loan. For example, you obtain a personal loan to pay outstanding bills and the loan contract gives the lender the authority to seize your stereo or CD collection or whatever property you have pledged, unless you make all the payments on time. The lender probably doesn’t care much about seizing that property; but will require you to pay another absurd cost: property insurance on the pledged items.
6. Additional predatory lending red flags. Here are some additional warning signs, red flags that the loan you are applying for may not be in your best interest:
a. Pretended Affiliation with the Navy, Marine Corps, or Department of Defense. Be wary of the lender that falsely pretends to be a government agency, or pretends that it is endorsed or approved by the Navy, Marine Corps, or Department of Defense. For example, you may get a letter in the mail from a mortgage company that pretends to be the Veteran’s Administration, telling you it’s time to refinance your home. Also, it is a virtually certainty that your local, off base maker of short term loans to junior troops is not approved or endorsed by any government agency. This is true no matter how many pictures they show you of their employees attending military functions, or how many flags they have in the office or on their internet site; no matter how many of their employees are retired military.
b. SCRA Waiver Federal Law, the Service Member Civil Relief Act, provides many important protections to service members. Be extremely wary of signing any contract that requires you to waive any of these protections. One of these protections is that, if you are sued and can not be present in court because of your military duties, such as a deployment, you can delay your case until you are able to be present. You don’t lose simply because you can’t show up. If you waive this right, you will be sued and you will lose by not showing up, even if you have a perfectly good defense. One variant of the SCRA waiver to be aware of is the hiring of an SCRA agent. In this scheme, you agree that the creditor doesn’t even have to notify you that you are being sued. Instead, all he has to do is notify an agent that you pay for. In these cases, the first you may hear about a lawsuit is when your wages are garnished, you credit destroyed, or your property attached or reposed.
c. Giving Account Information. Be extremely wary of any lender that says you are required to provide a blank or post dated check, to give them any permission to take money out of your account, or to give them your MyPay password or any access whatsoever to your military pay.
d. Disconnect between sales pitch and contract. Of course, you should carefully read the contract and if there is any disconnect between what the seller is telling you and what is written on the page, don’t sign.
Car Title Loans
1. In this kind of loan, the debtor is not taking out a loan to purchase a car. Instead, the debtor pledges a car he has completely paid off as collateral for a short term loan for a relatively small amount of cash. The loan must be repaid within thirty days. The annual interest rates can exceed several hundred-I say again several hundred- percent.
2. If the loan is not paid in full at the required time, which happens frequently, the lender will either make another loan at the outrageous interest rate, or take the car and sell it. The Military Lending Act makes it illegal to offer such loans to service members or their dependents. Anyone so desperate or foolish to even be considering such a loan should run, not walk, to their nearest MCCS financial counselor.
Seller Financed Transactions
1. Sometimes troops find that they don’t have enough money to pay up front for the things they want: that computer or big screen television, special tires rims, or a living room suite. So the seller allows them to take the item home as long as they agree to make monthly payments that cover the cost of the item as well as interest and other fees. If you are buying your consumer electronics or other items this way, you may want to reconsider whether it would be wiser to put that purchase off until you can really afford it, or maybe not make that purchase at all.
2. But if you do decide to finance your purchase, read the loan contract very carefully. Watch out for all the warning signs and hidden costs. Look for special conditions: Are you required to keep the property in the state? Are you required to insure the property? What is the interest rate claimed? What is the real interest rate when all the extra fees are included? Do they claim that the loan is governed by some other state’s law? Are you required to hire some agent that the seller can contact instead of you if the seller wants to sue you? Are you required to join some silly buying club offering merchandise out of a catalog, or selling some long term deal on the purchase of photo development services?
3. Don’t be surprised if you don’t completely understand your loan contract. Financing contracts are some of the most difficult to read, anti-consumer contracts you will ever find, with acres of fine print. Most of that fine print lists all the different ways you can default and all the actions the creditor can take against you if you do. If you don’t understand the contract, don’t sign it. Get some one you trust…not the seller… to explain it to you first.
Refund Anticipation Loans
1. Most service members and dependents pay income tax through tax withholding from their salary; that is, the Federal and state governments take a bite out of each paycheck to pay the year’s income taxes. After completing your annual tax return, you may find that you have paid the government more money than you owe and you are therefore due a refund, possibly a large sum of money. A large tax refund is particularly likely for deploying service members since all or virtually all of the income earned in the combat zone is tax free.
If you file electronically, you will receive your refund from the IRS within seven to fourteen days, depending on when in the processing cycle your return is received by the IRS. Many commercial tax preparation services allow you to get your refund money more quickly by selling refund anticipation loans (RALs). For a fee, the preparer provides you with funds equal to the amount of your anticipated refund either immediately (for an extra fee) or within a day or two. In effect, the tax preparer gives you an extremely short term loan. The RAL is a bad deal.
2. RAL Costs
a. Interest Rates. The RAL is, essentially, a loan lasting until you receive your refund. Since the IRS provides refunds quickly for electronically filed returns, the loan period is, at most, fourteen days for e-filed returns. You pay for this loan, this privilege of getting your money a few days sooner from the lender than you would otherwise get bit from the IRS. When figured on an annual basis, these basic RAL fees amount to interest rates of two hundred sixty percent or higher. Due to the Military Lending Act and its implementing regulation, some tax preparers are now offering RALs at an advertised rate of 36%, the maximum rate authorized under the law. This is still an enormously high rate of interest and foolish financial decision. Furthermore, if the tax preparer isn’t properly figuring in various additional fees being charged, the actual interest rate may be higher than the advertised rate.
b. Tax Preparation and Electronic Filing Fees. Service members and their dependents are eligible for free tax preparation and electronic filing at their installation tax center. If you are going to the commercial tax preparation service to obtain a RAL, that probably means that you are not getting your taxes done free at the Base Tax Center and are needlessly paying hundreds of dollars on tax return preparation and electronic filing.
c. Instant Refund Fee. If you want your money immediately, you may have to have qualifying credit and you may have to pay an additional fee. Otherwise, you get your loan in a couple of days.
d. Account Set Up Fee. In order to facilitate the transfer of the refund to the lender and/or the payment of the loan to the customer, the customer may be charged a fee for setting up a special account. If the customer has direct deposit, the fee may be reduced somewhat. Additional fees may be imposed for processing state refunds as well as Federal refunds.
5. . RALs Gone Bad. The RAL is a bad deal to begin with, but if you don’t get the refund that you anticipate, it gets even worse. Some consumers have complained that the refund check was not deposited into their account as anticipated, or that they paid tax preparation fees and electronic filing fees and then were turned down for the RAL. In addition, there is no guarantee that you will get a refund, even if your tax return says you should. The IRS may disagree with the manner in which you prepared your return, or the refund might get sent to an incorrect address, or perhaps your home state intercepts and seizes your refund to satisfy back taxes or child support in arrears. If these or any other things prevent you from obtaining the anticipated refund, you still need to pay the lender back for the RAL, with interest, except now you don’t have a refund check from the IRS to do it with.
In the past, tax preparers have even gone so far as to offer RALs even before the taxpayer receives a W2 or prepares any return. In these cases, the lender estimates the refund by using past year’s return, or a final pay stub or military leave and earnings statement (LES). Buying a RAL without first preparing a tax return greatly increases the likelihood of additional mistakes and difficulties.
But the bottom line is this:
RALs are a terrible financial choice,
ALL RALs are prohibited within MCIE, and
It is illegal for lenders to make RALs in excess of 36% to service members or dependents.
Vehicle Purchase Loans
1. General Information. Many of you may be thinking “I’m not foolish enough to get a payday loan or refund anticipation loan. My finances aren’t so bad that I’ll be asking for a high interest personal loan. That isn’t me.” Well, perhaps not. But the likelihood is great that you will be financing an automobile purchase. Most service members, certainly most junior troops, can not simply write a check to buy a car. They need a loan. Auto financing is a target rich free fire zone for cheats, deceptive salesmen, and predatory lenders. Here are some tools to avoid being victimized.
2. Monitoring and Cleaning Up Your Credit.
a. Importance of Credit Monitoring. To a large extent, the loan you qualify for depends on your credit history; or more to the point, your credit history as reported by the major credit reporting agencies such as Equifax, TransUnion, and Experien. Increasingly, credit reports are being used for other purposes as well such as determining auto insurance rates and making hiring decisions. Your credit score can be improved by paying off debt, especially delinquent debt, and by removing adverse, inaccurate information from your credit report. Credit reporting agencies have historically been notorious for having inaccurate records. Consumer’s Union reported to the U.S. Senate in 1993 that its study of 57 credit reports revealed that nearly half of the reports contained some inaccurate information. The U.S. Public Interest Research Group has made at least six studies of the issue, confirming a high percentage of reports with inaccurate information. According to U.S. PIRG, about 70% of credit reports contained some inaccurate information and about 29% of the reports contained serious inaccuracies that could result in the denial of credit; for example, the false reporting of delinquent debt. Given the high likelihood that your credit report contains some adverse, inaccurate information that could result in the denial of credit or a more costly price for credit, monitoring these reports –and taking action to remove inaccuracies- is clearly a prudent course of action.
b. Free Credit Reports. The Federal Fair and Accurate Credit Transactions Act (FACTA) [15 U.S.C. 1681 et seq] establishes a consumer’s right to obtain a free credit report from each of the credit reporting agencies once every twelve months. Thus, without spending a cent, you can monitor your credit, obtaining a free credit report every four months from a different credit reporting agency. Do not ask for a free credit report from all three of the credit reporting agencies at the same time; if you do, you won’t be able to get another free credit report for another 12 months. Also, make sure that you use the official U.S. government site http://www.annualcreditreport.com to obtain your credit report rather than the commercial sites that are so widely advertised. The Federal Trade Commission recommends that you order the reports by phone [(987) 322-8228] or by mailing in the request form, available on line at: https://www.annualcreditreport.com/cra/requestformfinal.pdf. Avoid all of the imposter web sites that offer “free credit reports,” which either just are not free or which use the free credit report to lure you in to purchasing credit monitoring services. Your military legal assistance attorney or command financial advisor can explain the steps to take to remove erroneous information from your credit report. Beware also of the “credit repairman” who, for an up front fee, offers to “fix” your credit report. If the information in your credit report is accurate, the “credit repairman” can’t remove it.
b. Credit Freeze. A “credit freeze,” can help to protect your credit history from unauthorized access, to protect against theft of your personal information from the credit history, and to protect against some other person pretending to be you and obtaining new credit in your name, such as a credit card or a loan. In order to initiate a credit freeze, you provide information and an application to each credit reporting agency that you desire to have the freeze, along with $10. You will receive a special password that must be used in order for anyone to access your credit report or to obtain additional credit in your name. Remember, if you want to obtain additional credit, or you want to authorize a prospective lender to access your credit history, you must provide the credit reporting agency with a request to “thaw” your credit for a desired period of time. The credit reporting agency must thaw the credit report within three days of your request, although they will generally do so faster. Additional information concerning the North Carolina credit freeze program can be found at the consumer protection website of the North Carolina Attorney General: http://noscamnc.gov/toolkit.html
3. Shop around for a good loan. You don’t have to get the loan from the car dealer. In many cases, the car dealer makes little or no profit on the sale of the car itself; but then makes a killing on the financing of the car, and the sale of warranties and insurance. You can shop around for loans just like you can shop around for cars. Better yet, visit your bank or credit union in person to determine what kind of a loan you qualify for before you going to the car dealer. Consider getting pre-approved financing from your financial institution. Too many people finance their vehicle through the car dealer simply because the car dealer makes it so convenient-even if expensive-to do so.
4. Deceitful, unfair antics associated with vehicle financing. Learn and be wary of deceitful, unethical, illegal practices perpetrated by car salesmen in the financing of vehicles. They are very common. They include, but are not necessarily limited to, the following:
a. Yo Yo Sales. In this predatory trick, you sign the purchase contract, give the dealer your trade in and maybe make a down payment as well. The seller lets you drive the car off the lot even though your financing is not “final.” A day or so later you get an ominous call from the dealer; “there’s a problem with financing.” He jerks you and the new car back to the dealership, like a yo-yo on a string. He says that those low rates aren’t available to you, but how about a terrible loan at a terrible rate? You tell him to cancel the sale because he isn’t fulfilling his promise to get you the original loan. You want your down payment back and your old car, too. The dealer tells you you’re not getting that down payment and besides, he’s already sold the trade in car. This practice is an illegal trick. It is a fraud designed to give the dealer a second opportunity to negotiate a deal with you. Contact your legal assistance officer, the consumer protection section of the state attorney general, and the DMV fraud inspector [In Onslow County, NC, (910) 455-8835]. Better yet, don’t ever drive a car off the lot until financing has been completed and finalized.
b. Bait and Switch Financing. The advertisement says that wonderful cars are available at great prices and interest rates. However, when you get to the car lot, you are told that you don’t qualify for that low interest rate or for that large a loan, but how would you like to buy this jalopy at 22% interest?
c. Fraudulent Financing Applications. That salesman wants to sell you a car. But what happens if you don’t qualify for a loan, either because you have insufficient income or maybe because you don’t even have a valid driver’s license, or because the size of the loan is completely out of whack with the value of the car? None of that is a problem for the crooked salesman, he just takes your driver’s license or LES or other documents, whites out the parts he doesn’t like and replaces it with phony information. Or presents a statement to the lender falsely stating that the car has additional options, artificially increasing its value. Then the documents get FAXed to your credit union or bank and, voila, you are approved for a loan. Three problems: First, there’s probably a good reason you don’t qualify for the loan-like you can’t afford it. Secondly, the loan is all based on fraud. There can be problems if the lender finds out. Maybe the lender decides to cancel because the application was all a lie. Then where are you? Thirdly, if you yourself knowingly assist the dealer to perpetrate this fraud, you may have civil or criminal liability, or both.
d. Product Packing. In this scam, the salesman tells you what your interest rate is, and then, when he calculates the monthly payments, he adds in additional products that greatly increase the cost: credit life insurance, disability insurance, GAP insurance, an extended service contract. Maybe he doesn’t even tell you about these products. Or he doesn’t tell you how much each of these items added to the cost, or he simply says they are extras that come with the car, never telling you that they are options you can choose not to buy. In many cases, the dealer makes far more money selling the car loan than selling the car.
e. Interest Rate Mark Up. In this scam, the dealer lies to you about the interest rate that you qualify for, sells you a loan at a higher rate, and pockets the difference. For example, the dealer calls your credit union and learns that you qualify for a loan at five percent interest. But then the dealer tells you that you qualify only for a loan at seven percent interest. He signs you up for a loan at seven percent and pockets the two percent difference between the real interest rate and what you were charged. Avoid this fraud by insisting that you personally talk to your lender, or, better yet get your loan in person at your bank or credit union. Or get pre-approved by a financial institution before going to the dealer finance office.
Illegal Debt Collection Practices
1. General Information. Debt collection is regulated by Federal law, state law, and Marine Corps Regulation. These laws and regulations are routinely violated, in part because consumers simply do not know their rights. Commanders, staff, and aggrieved consumers are urged to report violations to Legal Assistance Office and to the consumer protection section of the North Carolina Attorney General’s Office. Those in the chain of command receiving unlawful debt collection phone calls or unlawful debt collection correspondence are urged to report such unlawful actions and to provide the Marine concerned with a copy of relevant correspondence.
2. Federal Law. The Federal Fair Debt Collection Practices Act (FDCPA) [15 U.S.C. 1692 et seq] regulates the practices of debt collectors; generally, people hired by creditors to collect their debts. The FDCPA prohibits debt collectors from engaging in certain practices, including
-Misrepresenting the amount or anything else about the debt
-Contacting the debtor at the place of employment if the debtor knows that the employer prohibits the receipt of such calls there.
-Calling at an inconvenient time, such as before 8 a.m. or after 9 p.m.
-Contacting the debtor after the debtor requests that such communications cease;
-Providing debt information to third parties, such as a military commander or other person in the chain of command, without the written permission of the debtor given directly to the debt collector;
-Failing to accurately identify himself on the phone as a debt collector, or using obscene or profane language, or making repeated calls with the intent to annoy the debtor,
-Threatening arrest, imprisonment, garnishment of wages, or other actions unless lawfully authorized. In North Carolina, wages can be garnished for family support, but NOT for ordinary consumer debt. [See Harris v Hinson 87 N.C. App 148, 360 S.E. 2d 118 (N.C. App. 1987)].
-Misleading the consumer about the amount of the debt, or implying that the consumer must pay additional charges-such as interest or a debt collector fee- unless such charges are authorized by law.
-Threatening to repossess property, such as a car, unless there is some lawful right to repossession, such as court authorization or a permission granted in a loan contract
-Within five days of the initial communication, the collector must provide written notice indicating the amount of the debt, the name of creditor, and a warning that the debt will be considered valid unless the consumer objects within 30 days. If the consumer does object in writing, the collector must cease collection efforts until he has obtained verification of the debt and provides such verification to the consumer.
A collector who violates the statute can be sued and may be subject to pay damages of $1,000, and any actual money damages suffered by the consumer. Additionally, the court may order the offending debt collector to pay the plaintiff’s reasonable attorney fees. Further, the matter can be reported to the Federal Trade Commission (FTC) for enforcement.
3. State Debt Collection Statutes. States typically also have their own laws regulating debt collection. The Federal Fair Debt Collection Practices Act specifically authorizes states to make laws with greater consumer protections than provided by Federal law, and some of the states have done so. For example, North Carolina has a statute that applies to creditors (people trying to collect their own debts) [NC Gen Stat 75-50 thru 56]; as well as to debt collectors (people hired to collect other creditor’s debts) [NC Gen stat 58-70-1 thru 130]
The practices prohibited by state law are very similar to the practices prohibited by Federal law. Note, however, the broader application of North Carolina law, applying to creditors as well as debt collectors. Further, note that North Carolina prohibits creditors from contacting your command or other third parties unless the debtor gives written consent. To be valid, written consent must be given after default; that is, after you have already entered the contract and missed some payment. Any consent given in the loan application is therefore NOT VALID CONSENT.
The North Carolina Attorney General may sue to enforce North Carolina debt collection statutes. Aggrieved consumers may also sue to enforce the statute, and may recover up to $2,000 from collectors violating it.
4. Marine Corps Debt Collection Policy.
a. Governing Regulation. Marine Corps policy concerning debt collection is set out at chapter 16 of Marine Corps Order 5800.16A, the Marine Corps Legal Administration Manual (LegAdminMan). It is the policy of the Marine Corps that Marines pay their just financial obligations. It is also the policy of the Marine Corps not to assist in the collection of debts where the collector violates certain basic standards of fairness.
b. Standards of Fairness. Commanders will NOT assist collectors who
-Do not first make a good faith effort to collect the debt directly from the Marine;
-Who make obviously false or misleading claims;
-Whose collection efforts violate the Federal Fair Debt Collection Practices Act;
-Whose collection efforts violate state debt collection statutes. [In determining whether state debt collection law has been violated, the Policy directs commanders to look to the law of the state in which the installation sits, rather than the place of business of the collector.]
-Who are subject to Regulation Z [most lenders] unless the creditor executes a copy of the Certificate of Compliance (Figure 16-2 LegAdminMan), or other evidence of compliance, and a true copy of the general and specific disclosures provided the military member as required by the Truth in Lending Act. Requests that do not meet these requirements will be returned to the claimant without action. (See LegAdminMan para 16003.2)
c. Communication of Debt Information to Commanders and Other Third Parties. In most cases, the communication of any debt information by a debt collector to the command, without first reducing the debt to a court judgment or obtaining the valid consent of the debtor to engage in such communications, violates Federal law. In some states, including North Carolina, communication of debt information to the command by a debt collector or the creditor (the person to whom the debt is owed) violates the law… unless the creditor has first obtained a judgment from a court or has obtained valid, post default, written consent from the debtor.
d. Processing Complaints of Indebtedness
(1) Non-Complying Indebtedness Complaints. LegAdminMan Chapter 16 contains sample letters for use by commanders for the purpose of acknowledging receipt of a debt collection notice and politely telling the violating creditor or debt collector to follow the law. The legal assistance office and/or staff judge advocate may be able to provide further assistance.
(2) Processing Complying Indebtedness Complaints. MCO 5800.16A directs commanders to process complaints of indebtedness that do not violate either Federal or state law, comply with the standards of fairness, and do not otherwise run afoul of USMC indebtedness policy. In this context, “process” means that the Commander will review the relevant facts, including any potential defenses; advise the Marine that just financial obligations are expected to be paid in a proper and timely manner, what the Marine should do to comply with that policy, that financial and legal counseling services are available to assist in resolving indebtedness, and that failure to pay a just debt may result in the creditor obtaining a judgment from a court that could form the basis for collection of pay from the Marine pursuant to involuntary allotment. A “just financial obligation” is defined as a legal debt acknowledged by the service member in which there is no reasonable dispute as to the facts or the law; or one reduced to a judgment that conforms to the Service Member Civil Relief Act. If a Marine acknowledges a debt as the result of creditor contact with the command, the Marine will be advised that assistance and counseling are available from the on-base military banking office, the credit union serving the military field membership, and the local legal assistance office. Commanders will advise the creditor that the Marine concerned has been counseled concerning the obligations with respect to the claim. The commander’s response will not undertake to arbitrate any disputed debt, or to admit or deny the validity of the claim. Under no circumstances will the commander’s response indicate whether any action has been taken against the Marine as a result of the complaint.
5. Zombie Debt Collectors. In a dismaying development, the debt collection business is becoming increasingly infiltrated by so-called “zombie” debt collectors. These collectors purchase for pennies on the dollar, old, unsubstantiated or poorly substantiated debts that more legitimate organizations discarded as uncollectible. The business model is to buy up a huge inventory of such debt and then use the most abusive practices to collect on at least some of them, thereby turning a profit. In many cases, the zombie debt collector attempts to extract money not only by using illegal and abusive practices, but also by attempting to collect “debts” that never existed in the first place! Some harassed consumers are pressured to pay the collector to erase the non-existent debt in order to clean up a credit report and obtain a loan, or simply to stop the harassment. For example, in the Federal Trade Commission’s successful suit against National Check Control, the FTC found that the debt collector’s abusive tactics included threats to arrest debtors and the collection of “debts” that never existed. The defendant company, National Check Control, was order to pay 10.2 million dollars.
Actions and Reactions
1. Prevention. The primary purpose of this web posting is to make you a smarter consumer and thereby prevent you from getting rip off financing or suffering abuse at the hands of debt collectors. Hopefully, you are now going to read those contracts carefully, and obtain assistance as necessary. You will report questionable lending and debt collection practices to the legal assistance office, your chain of command, and appropriate government officials. You’re not going to get a payday loan, refund anticipation loan, or high interest personal loan. You are less likely to get taken in by financing schemes of the car salesman. You won’t be enticed into foolish, budget busting purchases. You will consider bounced check protection at your bank or credit union, and the wisdom of warranties and insurance to diminish the likelihood of unexpected, catastrophic expenses. You will consider, as appropriate, adjusting income tax withholding and part time employment for yourself or additional employment for your spouse. The Marine Corps/Navy Relief Society (NMCRS) and the Base Command Financial Specialist, as well as your chain of command, can assist. Take the appropriate steps before the trouble starts.
2. Reactions and Threat Assessment. Once you sign the predatory loan or default on a payment, your legal and practical position becomes much worse; your options diminish. Still, you may have options available that you are not even aware of. Like a Commander examining the battlefield, you must assess the threat. Also, like a Commander, you probably need the assistance of others to make such an assessment. The Commanding Officer uses his subordinate commanders and staff; you will use your staff: military legal assistance, your chain of command, the Navy and Marine Corps Relief Society, private counsel that you hire, and appropriate government agencies. There are many questions you may wish to address, some of which are listed below:
-Was the contract lawful in the first place? (If not, the creditor may not be able to enforce it.)
-Was the Military Lending Act and its implementing regulation violated?
-Was the state law regulating interest or other loan terms violated?
-Was the contract based on provable fraudulent promises of the seller?
-Is there an applicable insurance policy or warranty that may assist?
-Was there was some violation of the Truth in Lending Act or other Federal or state law that allows you to rescind the contract?
-Was the Federal Trade Commission three day cooling off period for door to door sales, a ten day cooling off period for life insurance sales, or some other cooling off period violated?
-Can the creditor or debt collector make good on their threat to repossess property? If so, under what circumstances? Can / should you make repossession more difficult for the creditor or debt collector? How would you do it?
-What legal processes must the landlord go through before eviction? How long does it take?
-Is this creditor authorized to contact your commander? Garnish your wages?
-Have illegal debt collection practices given you an action for damages that you can reasonably expect to offset against the amount that you owe?
-Has your failure to make timely payment already been reported to a major credit reporting agency? If so, what is the marginal harm to your credit of additional monthly delinquency reports to the credit reporting agency?
-Does the law or contract authorize the addition of interest, penalties, or debt collection fees to the principal amount of the original loan? Or is the debt collector exaggerating the amount, or the additional fees authorized, either to scare you into immediate payment or to maximize his profits?
-Did you enter the contract prior to military service, thereby authorizing you under the SCRA to reduce the interest rate to 6%, effective the date that you began military service?
-Do you have some other legal defense or counterclaim?
-Is negotiation for a lesser amount plausible?
-Is voluntary repossession a good option (generally not)? What are the mechanics of voluntary repossession and sale?
-Is the collection of the debt in court barred by the statute of limitations?
-Can/should you shield your assets from creditors by re-titling them in the name of a parent or a spouse?
-Can you simply ignore the collection effort; or put another way, is doing nothing a better option under the circumstances than other options?
-Can NMCRS provide a loan?
-Can you obtain reasonable short-term financing loan from a bank or credit union, or from friends or relatives?
-Will a consolidation loan help? If so, how do you distinguish the debt financers that can assist you from the blood suckers out to rip you off and make your financial situation even worse?
-Do you have assets you can liquidate?
-If there isn’t enough money to go around, which of the debts should get priority?
-Under the circumstances, should you consider bankruptcy as a means of liquidating debt?
These matters may well require the assistance of trained financial specialists and legal professionals. In preparation for your visit with such assistants, collect all of the relevant and available documents and bring them with you for examination. Visit the Navy Marine Corps Relief Society to help you with a budget, a grant, or a no interest loan. Sit down with your command financial advisor and/or legal assistance officer.
But, better by far….avoid the problem in the first place.