03/27/2007
The John Warner National Defense Authorization Act for Fiscal Year 2007 became law this last October. One small section of this Act, Section 670 under "Subtitle F--Other Matters," gives marching orders to the practices of creditors who prey upon military service members and their dependents. (A "predatory lending practice" is one considered to be "an unfair or abusive loan or credit sale transaction or collection practice.") Among those affected are businesses that offer military personnel deferred deposit transactions--small, short-term loans better known as "payday loans--without regard for their ability to repay and with excessive charges packed into the loan and terms requiring, for example, balloon payments and waiver of legal rights. Loans such as these have proven to be a source of spiraling debt for many military families.
Why should military service men and women need the protection from these lenders that Section 670 adds? In its August 2006 report on Predatory Lending Practices Directed at Members of the Armed Forces and their Dependents, the U.S. Department of Defense presents some eye-opening facts that answer that question.
At the outset, we should say that while the Department of Defense's report deals, in part, with predatory payday lenders, many payday lenders in California do not seek out military borrowers in particular and do comply with the law.
First, then, according to the report, the enlisted military personnel preyed upon by payday lenders are--at least 48 percent of them--under 25 years of age. They generally have little experience in managing finances, no savings cushion, and no family assistance close by. What they do have that makes them attractive to payday lenders is a regular paycheck, whatever its size, and no likelihood of quitting their employment or being downsized or laid off.
The likelihood is, rather, that these military personnel will need a small loan at some point. Thus some payday lenders concentrate near the front gates of military bases in states (including California) where payday loans are legal. One study found 161 payday lenders and 217 banks in San Bernardino County--home to several military facilities--alone, making it the highest payday lender-to-bank ratio in the State. Indeed, California's payday loans totaled almost $2.5 billion in 2005; the average annual percentage rate was 426.
Some estimates are that abusive fees associated with payday lending cost military families over $80 million every year. This figure does not include Internet payday loans, which are estimated to bring in $500 million annually.
As we've pointed out in our special report, noted at the end of this article, in California, a family (military or not) could face a formidable APR by, for example, borrowing $300 (the maximum allowable) for a week at 15 percent interest (the maximum allowable), which would result in a 780 percent APR. Although not the norm, this would be within California law.
The effects upon the military family can be dire when they must take out loan after loan, each with equally high APRs and fees, to repay the first and subsequent loans, yet end up owing much more than the initial loan and still not able repay it. (Although California law prohibits both entering into another deferred deposit agreement while a previous one is in effect and paying off one payday loan with the proceeds of another, these laws can be circumvented by both lender and borrower.)
The effects upon the military branches and the nation can be significant as well. An Associated Press article last September quoted a Point Loma Navy official as saying that under Navy rules, sailors with debts of more than 30 percent of their income cannot be sent overseas because their financial problems could distract them from their duties or, worse, make them vulnerable to bribery. Between 2000 and 2005, he said, Sailors' and Marines' security clearance revocations and denials increased by 1600 percent because of their financial problems. And, "'Almost every case of espionage in our military has in some way had ties to financial greed or need on the part of the individual.'"
In April 2006, California Assembly members Ted Lieu (D-Torrance) and Lori Saldana authored a bill to allow military members and their spouses to defer payday loan payments for a number of months and to prohibit the lenders from garnishing their pay or contacting their superiors to collect. Already amended a number of times, this bill, late in August, was again amended to add a 36 percent APR cap on payday loans, which rate would include in its calculation charges for any ancillary products and services sold by the lender and included in the amount financed.
Although this bill, Lieu said, was the first in the country to implement the Defense Department's recommendations, it did not pass. According to David Ford, Lieu's Chief of Staff, the inclusion of the interest rate cap amendment so late required an urgency clause, which required a two-thirds vote to pass. Some legislative members' concern about the restriction on military payday loans that would result, as well as the effects it might have on the poor and other segments of the population, discouraged them from supporting the bill. "The 36 percent was the crux," Ford says. But, he adds, "the real crux is that we don't pay our military young men enough."
Ford also says that many programs already exist to help military personnel, so they do not need payday loans.
Lieu and Saldana introduced a new bill in December. In committee at this writing, AB 7 provides that any violation of Section 670 of John Warner's Defense Authorization Act (which, although enacted last October, does not go into effect until next October) is also a violation of California law. Section 670 provides for the 36 percent APR rate cap and generally preempts other laws that may allow a higher rate. This cap is to include not only interest, but the total of any and all other costs or fees associated with the extension of credit. Although several states already have 36 percent rate limits, Georgia, for example, caps rates at 60 percent, and Nevada, where many Internet loans originate, has no rate cap.
Section 670, in addition to its many other protective provisions, also disallows violation or waiver of any State consumer lending protections on the basis of nonresident or military status of a person or dependent, regardless of where their permanent home is. Nor may the borrower be prohibited from or charged a penalty or fee for prepaying their loan. And if a creditor's contract contains any provisions prohibited by the section, it is void.
How is a law that doesn't even become effective until next October going to help service men and women now? Lieu's bill refers to the provisions of Warner's Act. Thus, if passage of AB 7 occurs earlier, California lenders will have to comply earlier.
While most Americans would hope that these protections for our service members will be enacted soon, still more will undoubtedly hope that the very need for them, as well as the additional deployment they will enable, will disappear even sooner. So far we're still waiting for both.
For information on current California law affecting payday transactions, access our report no. 57, Hard Cash: Check-Cashing Transactions and Payday Loans on our website or use your private membership line to call to request a copy.