Payday Loans & Local Government

USA today 08/31/06

As many as one in five members of the armed services are being preyed on by loan centers set up near military bases that can charge cash-strapped military families interest of 400% or more, a new Pentagon report has found.

ON DEADLINE: Read the full report

Steep lending charges have long plagued servicemembers, but the problem has become a more urgent concern to the military as it has struggled to fill its ranks during the Iraq war. That's because debt troubles can keep troops from going overseas.

"We're seeing a growing trend of folks who are not eligible to deploy because of financial problems," says Capt. Mark Patton, commander of Naval Base Point Loma in California. Patton says debt problems can cost some servicemembers their security clearances.

The report says "payday loan" stores (so named because their loans are often due on a borrower's next payday) have sprung up by the thousands around military bases and elsewhere in the past decade.

Lenders typically charge $15 to $25 per $100 loan for two weeks, and most loans are extended for several weeks. The report says the average loan is $350 and has an annual interest rate of 390% to 780%. The average borrower, it says, pays back $834 for a $339 loan.

The report cites estimates 13% to 19% of servicemembers ???????? at least 175,000 people ???????? took out high-interest, short-term loans last year. It said nine out of 10 loans go to borrowers who take out five or more over a year.

Congress ordered the Pentagon to conduct the lending study. This year, the Senate passed an amendment to its annual defense spending bill that calls for a 36% cap on interest for loans to servicemembers. It would not affect loans to civilians.

The House version of the defense bill doesn't include the amendment. A joint committee will begin working out differences between the two versions next month.

Such lending, the report says, hurts readiness and morale and "adds to the cost of fielding an all-volunteer fighting force."

That's a misguided critique of a valuable service, says Darrin Andersen, president of the Community Financial Services Association of America, the payday lenders' trade group. The Pentagon, he says, "is in over its heads when it comes to ... complex personal finance and lending issues."