Pentagon's plans to protect military target payday, other lenders
By TOM SHEAN, The Virginian-Pilot
August 15, 2006
The Pentagon, citing the harm that short-term, high-interest loans have caused some members of the military, is calling for federal and state restrictions on the credit that payday lenders, car-title lenders and others extend to service personnel.
The Pentagon repeated its request for a 36 percent annual percentage-rate federal ceiling on short-term loans made to members of the military in a report issued late last week. In addition, lenders should be barred from extending credit to service personnel without taking into account the applicant's ability to repay, it said.
Whether they take the form of payday loans or other types of credit, high-interest loans can leave service members "with enormous debt, family problems, difficulty maintaining personal readiness and a tarnished career," the Pentagon's report said.
"Predatory lending," it declared, "undermines military readiness, harms the morale of troops and their families, and adds to the cost of fielding an all-volunteer fighting force."
Congress ordered the report last year as part of the National Defense Authorization Act for fiscal 2006.
According to a study by the Navy's Central Adjudication Facility, the Pentagon report said, the number of its revocations and denials of security clearances for financial reasons jumped from 212 in fiscal year 2002 to 1,999 in fiscal 2005. That year, financial reasons accounted for 80 percent of all revocations and denials, it said.
In a summary of 17 case studies involving soldiers, sailors and airmen who received financial counseling, the report said many of the borrowers resorted to payday loans, high-interest installment loans, and car-title loans because of a financial emergency, a history of over-extended credit or both.
The Pentagon also noted that payday lenders rely on repeat borrowers, who are sometimes overwhelmed by the interest payments on loans they've rolled over. The report acknowledged that better education, counseling and borrowing alternatives are needed to curb the high-cost lending promoted by payday lenders, car-title lenders and others. However, tougher state and federal statutes are essential, it said, because of the predatory tactics that these lenders use.
Payday lenders, car-title lenders, rent-to-own stores and other types of lenders, the report said, "seek out young, financially inexperienced borrowers who have bank accounts and steady jobs, but also have little in savings, flawed credit or have hit their credit limit."
A trade association for payday lenders blasted the Pentagon study Monday as "nothing but a rehash of flawed data, biased analyses and anti-business philosophy pushed by fringe activists."
"The Department of Defense is an expert at preparing for war, but it is in over its head when it comes to making recommendations about complex personal finance and lending issues," Darrin Andersen, president of the Community Financial Services Association, said in a statement.
The Pentagon's call for an interest-rate cap of 36 percent would make it impossible for payday lenders to extend credit to members of the military, the association said.
The Pentagon's latest recommendations for curbing high-interest, short-term loans to service personnel come as a congressional conference committee is weighing whether to adopt a 36 percent annual percentage rate ceiling for small, short-term loans to service personnel. The amendment, sponsored by Sen. Jim Talent, R-Mo., and Sen. Bill Nelson, D-Fla., was passed by the Senate earlier this year. There is no comparable bill in the House.
Jean Ann Fox, director of consumer protection for the Consumer Federation of America, said a federal interest-rate cap was needed for payday loans, car-title loans and other short-term credit to service personnel because "half the states don't apply their credit laws to nonresidents," such as members of the military. Virginia and several other states, meanwhile, have carved out legislative exceptions that allow payday lenders to charge significantly higher rates than they otherwise could, she said.
Two years ago, the Defense Department called on the states to adopt 10 measures that it said would improve the quality of life for service members and their families. One of the measures was state enforcement of their usury laws to prohibit payday lending. To date, 11 states, including North Carolina, have aggressively enforced strong usury laws, it said. Virginia is not one of them.
In Virginia, the volume of payday lending last year jumped more than 21 percent to $1.2 billion, according to the state's Bureau of Financial Institutions. Meanwhile, the number of borrowers who took out at least a dozen loans from a single lender climbed 19 percent to 90,859, the bureau said in its annual report for 2005. That figure accounted for one-fifth of the total number of borrowers, it said.
Virginia allows payday lenders to lend as much as $500 for one to four weeks. They are allowed to charge $15 for every $100 lent, which works out to an annual percentage rate of 390 percent for a two-week loan. That doesn't include fees that may be tacked on to a loan.
By TOM SHEAN, The Virginian-Pilot
August 15, 2006
The Pentagon, citing the harm that short-term, high-interest loans have caused some members of the military, is calling for federal and state restrictions on the credit that payday lenders, car-title lenders and others extend to service personnel.
The Pentagon repeated its request for a 36 percent annual percentage-rate federal ceiling on short-term loans made to members of the military in a report issued late last week. In addition, lenders should be barred from extending credit to service personnel without taking into account the applicant's ability to repay, it said.
Whether they take the form of payday loans or other types of credit, high-interest loans can leave service members "with enormous debt, family problems, difficulty maintaining personal readiness and a tarnished career," the Pentagon's report said.
"Predatory lending," it declared, "undermines military readiness, harms the morale of troops and their families, and adds to the cost of fielding an all-volunteer fighting force."
Congress ordered the report last year as part of the National Defense Authorization Act for fiscal 2006.
According to a study by the Navy's Central Adjudication Facility, the Pentagon report said, the number of its revocations and denials of security clearances for financial reasons jumped from 212 in fiscal year 2002 to 1,999 in fiscal 2005. That year, financial reasons accounted for 80 percent of all revocations and denials, it said.
In a summary of 17 case studies involving soldiers, sailors and airmen who received financial counseling, the report said many of the borrowers resorted to payday loans, high-interest installment loans, and car-title loans because of a financial emergency, a history of over-extended credit or both.
The Pentagon also noted that payday lenders rely on repeat borrowers, who are sometimes overwhelmed by the interest payments on loans they've rolled over. The report acknowledged that better education, counseling and borrowing alternatives are needed to curb the high-cost lending promoted by payday lenders, car-title lenders and others. However, tougher state and federal statutes are essential, it said, because of the predatory tactics that these lenders use.
Payday lenders, car-title lenders, rent-to-own stores and other types of lenders, the report said, "seek out young, financially inexperienced borrowers who have bank accounts and steady jobs, but also have little in savings, flawed credit or have hit their credit limit."
A trade association for payday lenders blasted the Pentagon study Monday as "nothing but a rehash of flawed data, biased analyses and anti-business philosophy pushed by fringe activists."
"The Department of Defense is an expert at preparing for war, but it is in over its head when it comes to making recommendations about complex personal finance and lending issues," Darrin Andersen, president of the Community Financial Services Association, said in a statement.
The Pentagon's call for an interest-rate cap of 36 percent would make it impossible for payday lenders to extend credit to members of the military, the association said.
The Pentagon's latest recommendations for curbing high-interest, short-term loans to service personnel come as a congressional conference committee is weighing whether to adopt a 36 percent annual percentage rate ceiling for small, short-term loans to service personnel. The amendment, sponsored by Sen. Jim Talent, R-Mo., and Sen. Bill Nelson, D-Fla., was passed by the Senate earlier this year. There is no comparable bill in the House.
Jean Ann Fox, director of consumer protection for the Consumer Federation of America, said a federal interest-rate cap was needed for payday loans, car-title loans and other short-term credit to service personnel because "half the states don't apply their credit laws to nonresidents," such as members of the military. Virginia and several other states, meanwhile, have carved out legislative exceptions that allow payday lenders to charge significantly higher rates than they otherwise could, she said.
Two years ago, the Defense Department called on the states to adopt 10 measures that it said would improve the quality of life for service members and their families. One of the measures was state enforcement of their usury laws to prohibit payday lending. To date, 11 states, including North Carolina, have aggressively enforced strong usury laws, it said. Virginia is not one of them.
In Virginia, the volume of payday lending last year jumped more than 21 percent to $1.2 billion, according to the state's Bureau of Financial Institutions. Meanwhile, the number of borrowers who took out at least a dozen loans from a single lender climbed 19 percent to 90,859, the bureau said in its annual report for 2005. That figure accounted for one-fifth of the total number of borrowers, it said.
Virginia allows payday lenders to lend as much as $500 for one to four weeks. They are allowed to charge $15 for every $100 lent, which works out to an annual percentage rate of 390 percent for a two-week loan. That doesn't include fees that may be tacked on to a loan.