Protecting service members

Personal Finance

October 24, 2006|By Eileen Ambrose | Eileen Ambrose,Sun Columnist

Two new laws seek to protect military service members from being financially taken advantage of on the home front.

One aims to prevent agents and brokers from using misleading tactics to sell high-priced insurance and investments to troops. The other caps the annual interest rate payday lenders can charge service members for advances on their paychecks.

The help is needed. Last week, the Associated Press reported that thousands of troops are so far in debt that they are losing their security clearances and, as a result, are unable to serve overseas.

Regulators say many new service members are financially inexperienced, making them vulnerable to sales pitches from those selling inappropriate or costly products.

"They are coming in many times right after high school. They are young and many times they are young marrieds. ... Chances are the military is their first real paycheck," said Joseph P. Borg, president of the North American Securities Administrators Association. "Anyone at that age, whether in the military or not, is a novice when it comes to financial education."

Concern about troops' finances has been growing in the military and Congress. A 2004 investigation by The New York Times that found young soldiers were being sold confusing, unsuitable and expensive products prompted the recent legislation.

The first, the Military Personnel Financial Services Protection Act, was signed into law last month. It targets the sale of high-priced products and abusive sales practices.

The act requires agents selling private life policies to tell soldiers that they can buy insurance from the government and at what price.

The Department of Defense must keep a list of brokers and agents barred from bases to prevent them from moving from one base to another.

The act also bans the sale of so-called periodic payment or contractual plans starting later this month. Under these plans, investors indirectly invest in a mutual fund by promising to make small monthly contributions for 15 to 20 years.

These plans haven't been pitched to civilians for decades because of excessive upfront sales commissions that could be as much as 50 percent of the first year's contributions, experts said. Yet they continued to be sold to service members with inadequate disclosures of how the fees worked, said Elisse Walter, a senior executive vice president with the NASD. "They actually invested to their detriment," she said.

Often, too, service members did not keep up with the contributions and wound up paying hefty surrender charges, said Jim Ludwick, an Odenton financial planner who is retired from the Air Force.

A provision of a defense bill signed by President Bush this month tackles payday lending, in which workers get an advance on their paycheck through a short-term loan. Payday lenders often congregate outside military bases. Fees charged often result in an annual percentage rate of several hundred percent.

The provision caps the annual interest rate a payday lender can charge a service member at 36 percent. That limit will take effect by October 2007. (Maryland years ago set its rate cap at 33 percent for small loans to prevent payday lending abuses.)

Ludwick said the new laws will go long way toward protecting troops because there will be more supervision of people soliciting on bases. And the payday lending caps will reduce "the likelihood that many service members will get in over their heads," he said.

Questions? Comments? Write personal.finance@baltsun.com.

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