Congress passes legislation to limit payday loans made to military

Colorado Springs Business Journal, Oct 6, 2006 by Rob Larimer

Soldiers will no longer be the target of predatory payday lenders.

That's essentially what Congress said last week when it passed legislation that limits payday loans made to military personnel to a 36 percent annual percentage rate.

Payday loans are a short-term, high-interest advance on an upcoming paycheck.

The cap came as Colorado Attorney General John Suther's office released annual sub-prime lending statistics that show the state's payday loan industry boomed last year.

From 2004 to 2005, payday loans grew 34 percent to reach a total of $500 million, a figure that has doubled since 2002.

In contrast, Colorado's bankers celebrated a healthy commercial lending year last year, with growth of 13 percent.

Payday loans in Colorado totaled $34 million in 1996 and grew to $106 million in 2000. In 2001, the total reached $180 million and $368 million in 2004, according to the attorney general's report.

Sub-prime is a term ascribed to lenders that charge at least a 12 percent annual interest rate on loans, and payday loans almost always exceed sub-prime standards.

The average payday loan in Colorado last year was $300 and carried an annual percentage rate of 345 percent, according to the report.

Prior to Congress's payday loan cap, Colorado's maximum allowed charge was $75 for a $500 payday loan, which translates into an APR of 390 percent.

Under the 36 percent military lending cap, a fee of $1.38 per $100 advanced will be allowed.

The payday loan industry has defended itself against critics by saying it provides a valuable emergency lending resource.

That's a defense Sharon Reuss, a spokeswoman for the Center for Responsible Lending, laughed at.

"It's a misnomer that this is an emergency credit option. Our research shows that only 1 percent of payday borrowers are able to pay back the loan on time," she said. "It's a debt trap."

It's a trap, Reuss said, because borrowers get an advance on their paycheck intending to pay back the loan immediately, but later find they don't have the money and get another advance, and so on.

The attorney general's report shows that is true for some borrowers.

About 15 percent of Colorado's borrowers had 13 or more payday loans last year, which means they were indebted to payday lenders for half the year.

"It's a major issue," Reuss said. "This is a business that preys on the lower and middle class people."

And those aren't the only socioeconomic groups that the lenders prey on, Reuss said, there's also the military.

According to CRL's statistics, active-duty military personnel are three times more likely than civilians to take out payday loans. One in five active-duty military personnel were payday borrowers last year, and payday lending costs military families more than $80 million in fees every year.

"If that doesn't show they're targets, I don't know what does," Reuss said. "Ask any soldier, and they'll tell you. Ask them how many payday loan businesses are located near their base."

But the payday loan industry released statements last week that in essence shrugged off accusations that it targets military personnel and said the interest rate cap will have little affect on their business.

"We are extremely disappointed that Congress has chosen to take away a valuable financial choice from service members," Darrin Andersen, president of Community Financial Services Association of America, is quoted as saying in the release.

The release says that military payday loans represent $80 million - 1.3 percent - of the industry's $5.5 billion in revenue, and that the lenders would probably stop doing business with military personnel.

"Congress has voted to eliminate an option, but has done nothing to eliminate the demand," the statement said. "While this will only have a slight impact on our industry's bottom line, it will have a large impact on individuals in the military who will have to look elsewhere when they are in need of a short term loan."

Reuss said that while the payday lending industry may not be sweating the loss of military customers, it could face problems if it also loses middle- and low-income customers.

And it appears the industry is aware that it might be losing the public relations campaign.

Denzenhall Resources, a public relations firm that specializes in crisis mitigation, has been hired to represent the payday loan industry.

The firm has been involved in Wal-Mart disputes and most recently with Hewlett Packard.

The company's Web site says "Denzenhall Resources is in the business of helping clients through crisis, conflict and controversy - Our mission is more often to protect reputations and assets in the face of allegation or peril, than to disseminate 'good news.'"

"They know the military interest rate caps are a sign of things to come. This is the first step to showing what a slimy industry this is," said Jordan Ash, director of financial justice for the Association of Community Organizations for Reform Now, or ACORN, which represents the needs low- and moderate-income families.

Ash said the campaign to cap interest rates for soldiers took a few years, and that a cap for civilian borrowers might take another few years.