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Lawmakers, DoD Take Aim at Payday Loan Sharks

By Donna Miles
American Forces Press Service

WASHINGTON, Sept. 1, 2006 – Interest is building on Capitol Hill in putting a nationwide cap on the interest rates lenders can charge servicemembers for loans, a measure the Defense Department is pushing to protect its force.

A General Accountability Office study released last month offers insight into how payday-lending businesses frequently gouge troops short of cash by charging exorbitant interest rates on loans borrowed against their next paychecks.

“The Report On Predatory Lending Practices Directed at Members of the Armed Forces and Their Dependents” notes that as many as one in five servicemembers are falling prey to loan centers near military bases.

It estimates that 13 to 19 percent of military people took out high-interest, short-term loans last year — typically borrowing about $350 a pop at interest rates of 390 percent to 780 percent.

These loan centers have sprung up like dandelions around military bases. According to the report, they target young, financially inexperienced borrowers who have bank accounts and steady jobs, but also have little in savings and credit problems or maxed-out credit balances.

The report cited an airman at Maxwell Air Force Base, Ala., as an example of the troops who enter into these loan agreements to begin a cycle of debt that’s nearly impossible for many to reverse. She initially borrowed $500 through a payday loan with an agreement to pay back $600 in two weeks. She then took out other payday loans to cover that bill and ended up doing multiple rollovers on each loan.

Ultimately, the airman contacted an installation loan company that gave her a $10,000 loan at a 50 percent annual percentage interest rate. The total cost to pay off the payday loans came to $12,750, and her total obligation to the installment loan company rose to $15,000.

The Defense Department notes that the airman is far from alone and is exerting a major effort to educate troops about the potential dangers of predatory loans and better ways to manage their finances, the GAO report notes.

The expanded education effort, launched last year, reached more than 400,000 servicemembers and their family members in 2005. In announcing the program, John M. Molino, then the deputy undersecretary of defense for military community and family policy, noted that the wide use of payday loans within the military has the potential to impact on mission accomplishment.

“If you’re in debt, you have other things in mind,” he said. “You’re doing things other than concentrating on the mission; maybe you’re taking on other employment. The effects are long-lasting and go deep into a person’s performance. It affects unit readiness.”

In addition to educating military members about the dangers of payday loans and familiarizing them with ways to put themselves on a sound financial footing, the military is seeking better protections for its members, and Congress is taking heed. Among measures DoD wants to see instituted are:

-- A requirement that lenders disclose information regarding the extension of credit in a uniform, unambiguous way;

-- A federal ceiling on the cost of credit to all military borrowers, capping the annual percentage rate;

A ban on lenders extending credit to servicemembers and family members without regard for their ability to repay the debt;

-- A prohibition on loan contracts that require servicemembers and their families to waive their rights to take legal action and on contract causes that reuire them to waive any special legal protections afforded to them; and

-- A ban on states discriminating against servicemembers and families stationed within their borders, and on lenders from making loans to servicemembers that violate the state’s consumer protections.

The U.S. Senate passed an amendment in June that establishes a 36-percent cap on annual percentage rates on loan to military members and their families. The bill is now in conference committee with the House of Representatives.

In addition to DoD and members of Congress, Paul Leonard from the Center for Responsible Lending expressed hopes that the amendment will pass. “We’re hoping Congress will stand up to the payday industry,” he said. “Our service people deserve far better than financial ruin – or trying to survive in a war zone while they’re fretting about how they’ll pay next month’s bills."

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