As a part of the Defense Reauthorization Bill of 2007, Senators Jim Talent, R-Mo., and Bill Nelson, D-Fl, introduced a bipartisan amendment that caps interest rates for all loans to service members and their dependents at 36 percent. This amendment, which passed the Senate at the end of June, attempts to curb the practice of payday lenders targeting military personnel. The Talent-Nelson amendment is an important step in protecting unsuspecting and vulnerable service members from predatory lenders and should remain in the conference committee bill.
As an extension of this amendment, Congress should also take measures to protect non-military borrowers from payday lenders.
Payday lenders offer highcost, short-term loans that often result in annual percentage rates of more than 400 percent. If a borrower is unable to pay off the full amount of the loan at the end of the loan period (typically two weeks), he or she must pay additional fees without receiving any additional money. Borrowers get caught in a cycle of debt where they keep paying fees every two weeks until they can pay off the full amount of the loan. The Center for Responsible Lending (CRL) estimates that the average payday borrower pays $1,105 to borrow just $325.
A study by Professors Chris Peterson of the University of Florida and Steven Graves of California State University, Northridge showed geographic evidence that payday lenders aggressively target military personnel. Payday lenders target service members because they are often young, financially inexperienced and strapped for cash, especially at the time of deployment. A December 2004 New York Times study revealed that 25 percent of military households have used payday lenders. The prevalence of high-cost borrowing among service members led the Department of Defense to list predatory lending as one of the top 10 threats to members of the military.
The high rate of payday lender use among military personnel is a national security issue because it leads to financial troubles that can affect personnel readiness and their effectiveness in combat, as well as a service member’s ability to deploy. Debt can distract service members from their duties or possibly cause them to become security risks open to compromise. According to the Marine Corps News, the Navy and Marine Corps denied security clearance to about 2,000 service members nationwide in 2005 because of concern that their indebtedness could compromise key operations.
The Talent-Nelson amendment would protect service members from predatory lenders by capping interest rates. However, payday lenders do not just target military personnel. Throughout the country, there are more payday lenders than McDonalds and Burger Kings combined. Payday lenders target millions of low-income consumers who have little to no savings and live paycheck to paycheck, including lowincome families, the elderly, and military personnel. Congress should protect all consumers targeted by payday lenders — not just service members. Should the bus drivers who take our kids to and from school be subject to abusive lending that we prohibit for military personnel?
Although payday lenders claim to be providing access to credit, they are really just trapping borrowers in a cycle of debt. CRL finds that only one percent of payday loans are given to borrowers who are able to pay their loans off within the standard two-week loan period and do not borrow again that year. This means that the other 99 percent of borrowers are caught in a cycle of debt. Under the Talent-Nelson amendment, annual interest rates would be capped at 36 percent, thereby eliminating this predatory practice for military families. The next step is to extend these protections and to ensure that all people have access to affordable smallsum loans. It is unpatriotic and unethical to allow this predatory practice to continue.
Lawrence J. Korb is a Senior Fellow at the Center for American Progress and Jenna Churchman is a Research Associate for Economic Policy at the Center for American Progress.
This column is reprinted with permission from the Albuquerque Journal where it appeared July 17, 2006.