CFPB Plans Financial Boot Camp for Military

WASHINGTON — Despite a concerted effort from the Defense Department to help members of the military achieve greater financial stability, there is still an enormous financial education gap.

That was the message at a forum last week hosted by the Consumer Financial Protection Bureau's Office of Servicemember Affairs, which gathered representatives from the mortgage and banking industry, as well as some of the military's top officials, to talk about the ongoing financial challenges servicemembers face.

The forum also highlighted some of the areas — housing and payday loans, in particular — the office will focus on as it begins coordinating with federal and state agencies to raise awareness about consumer protection issues.

"We definitely don't want to reinvent the wheel or create things that are already there, so an important part of it is always going to be dialogue, and working collaboratively," Holly Petraeus, the assistant director overseeing the office, said in an interview Thursday. "I'm not too proud to take other people's good ideas, as long as they'll let me take them, and expand on those."

To that end, the office is planning to unveil its first education product early next year that could be delivered to servicemembers individually via computer or smart phone.

It would enhance the financial aid course that the military offers during basic training, but would be offered earlier, at a time when servicemembers are more likely to retain the information.

The office, which is part of the bureau's consumer education and engagement division, is also in the planning stages of a similar education product for military spouses, who are often responsible for household finances, especially during deployments.

It's an important issue to Petraeus, who has spent the past 37 years as a military spouse, married to CIA Director David Petraeus, the former commander of U.S. forces in Afghanistan.

In the meantime, the office is also highlighting the products that banks and credit unions are already offering to servicemembers — including short term credit, matching savings programs and guaranteed direct deposit in the event of a government shutdown — and showing how those products can be profitable.

Banks and credit unions that are located on or near military bases have for several years offered products that serve as an alternative to those offered by unscrupulous lenders.

For example, many offer short-term, small dollar loans with as little as 12% to 18% interest, a small fraction of the interest charged by payday lenders.

Although some bankers at the forum said these products and others are subsidized by more profitable products, they help build relationships.

Yet others said they've found a way to not only make it work, but make it a good business practice.

James Blaine, the president and chief executive of State Employees Credit Union in Raleigh, N.C., said the company's small-dollar loans are its most profitable product.

The credit union offers loans of up to $500 for 31 days, at 12% interest, for customers that have a checking account with direct deposit. The company has a 4% loss ratio, 2% cost of funds ratio and 2% cost of operations ratio — leaving it with a 4% return on those loans.

"This is your profitability model," Blaine said. "We have made five million loans over 10 years. We have the metrics. I defy anybody to challenge these metrics."

There can be risks to offering something new or different, said Camden Fine, the president of the Independent Community Bankers of America.

Regulators tend to view unique products with skepticism, he said. It also used to be easier for a banker to help a young servicemember who may not have established credit, Fine said.

"Unfortunately, in order to go after the bad actors in the financial services industry, the laws then sometimes inhibit the bank from cutting a young servicemember a break, because you have fair lending issues, you have [Truth in Lending Act] issues, you have examiners come in that don't understand the military lending needs," he said. "Sometimes we get tripped up on well-meaning regulations."

Still, Petraeus said the work of those banks — some of which was highlighted by the Federal Deposit Insurance Corp.'s Small Dollar Loan Pilot Program in 2008 — could become more mainstream.

"Quite often the military has been a test bed for programs that have later gone on to be applied to the more general population," she said. "So some of these initiatives I think are great for other demographics, possibly lower-income or … underbanked customers."

One of the biggest issues facing the military today is housing, Petraeus said.

Servicemembers receive orders about every three years — known as permanent change of station, or PCS — to deploy to a new location. With the housing downturn, however, many of them are in a position where they need to sell, but still owe more than the house is worth.

To complicate matters, many are trying to deal with the situation while deployed overseas, an issue that significantly impacts the readiness of our military forces, officials said. If a member of the military defaults on a loan, for example, the individual would lose his or her security clearance — an essential requirement for many military jobs.

The Defense Department launched a program in 2002, in cooperation with nonprofit consumer and financial education groups, to help troops prepare for the possibility of deployments in Iraq and Afghanistan.

Some of the recent issues have been corrected by policy changes to federal programs that make it easier for members of the military to qualify for assistance. Still, a handful of mortgage industry representatives said they have no way of flagging or tracking borrowers who are members of the military, and thus no way to reach out to them about special benefits.

In some cases, servicers acknowledged that their personnel didn't understand the rules. In a major settlement announced earlier this year, Bank of America agreed to pay a $20 million settlement for allegedly violating the Servicemembers Civil Relief Act by improperly foreclosing on members of the military.

The Federal Housing Finance Agency is in the process of building a database that would include a field to denote whether a borrower is dealing with a PCS, Emily Drake, a principal policy analyst for the Federal Housing Finance Agency, said at Tuesday's forum. One of the biggest challenges is creating consistency among servicers, she said.

"Education feeds into that," Drake said. "People need to be aware of what is available to them and what is not available."

Another key part of the office's mission, Petraeus said, is making sure that the members of the military — a culture that places a premium on personal responsibility — also know how to help themselves.

"I want to educate them first of all that there are resources there, second, not to be afraid to use them, but third, to not walk blindly into some of these financial traps that may be there for them early on," Petraeus said.

When Petraeus asked a panel of military officials how many of them thought early financial education in the military should be mandatory, every hand went up.

But it's not enough to just educate them, they said. They encouraged the CFPB to think about how to reach soldiers of all ages, through different platforms, and at each level of their career as they're experiencing different life events.

"You can't just teach it one time at one location and expect soldiers to get it," Thomas Gills, the sergeant major to the Army deputy chief of staff, said at the forum Tuesday. "I think that's where this body could really give us some help, because I'm not qualified truly to educate the masses."