Military personnel are target of lending fight

The U.S. banking industry may join an effort by payday lenders to amend legislation that caps interest rates on loans to military personnel.

A last-minute addition to the 2007 Defense Authorization Bill forbids rates in excess of 36 percent per year, a fraction of the triple-digit rates usually imposed. Payday lenders fought hard against the provision, but were undone by the findings of a Department of Defense report that concluded credit woes were sapping the morale of financially unsophisticated soldiers, sailors, airmen and their families.

“Predatory lending undermines military preparedness,” the report said.

In other words, not only are our armed services overextended because of the war in Iraq, many of our service men and women are, too.

Although the rate cap does not kick in until October 2007, payday industry spokesman Steven Schlien says Advance America has already stopped lending to members of the military. Other companies may soon follow suit. Advance America is the largest payday lender in the U.S. by number of branches, including 13 in Spokane and Kootenai counties. .

The industry makes $40 billion in loans annually, earning $5.6 billion in revenues. A cap will not allow some branches to cover overhead, let alone show a profit, officials warned during congressional debate over the measure. Members of the military might needlessly lose access to credit, they said.

“Our customers love us,” says Schlien.

All too well. And Washington residents are no exception. According to the state Department of Financial Institutions, the number of state-licensed payday lenders increased almost 50 percent, to 131, from 2000 to 2005. Total locations at the end of the year was 716, almost double the 2000 total.

Loan volumes increased even more depressingly, from $581 million in 2000 to $1.4 billion last year. The average loan amount was $385, the average fee was $48.

Depressingly, because those are fees charged on 45-day loans. Washington limits fees on loans up to $500 to 15 percent. The cap on the next $200 — $700 is the largest loan allowed — is 10 percent. At maximum, the fees cannot result in an annual interest rate higher than 390 percent. That, sadly, is the second-lowest rate allowed by the 36 states that permit payday lending.

That could change if the 2007 Washington Legislature broadens the federal limits on loans to military personnel to apply all consumers.

Deb Bortner, DFI’s regulatory counsel, says some lawmakers are asking why, if an interest limit works for some loans, it does not work for others. The state could also follow the example of Florida and others that keep a database of payday loans, and limit the number of loans allowed, she adds.

But Bortner notes payday lending generates a relatively small number of consumer complaints given its business volume. Mortgage brokers are a bigger problem. The stakes for consumers who stand to lose their homes are much greater than for those struggling with consumer debt.

“How paternalistic is the state going to be about allowing or not allowing people to get into that situation?” she asks.

Meanwhile, the American Bankers Association may ask Congress to revisit the payday lending issue.

Wayne Abernathy, the association’s executive director for government relations, says the rate limit is less a concern than hastily drafted language that left unclear what loans are covered, and who will administer the new law.

If the rate caps are applied to small ATM transactions, for example, a $2 service fee could equate to an interest rate far in excess of 36 percent, he says.

Consumer lending issues are not normally the purview of the Defense committees that put together the authorization bill, he says. The lack of input from more knowledgeable representatives and senators, as well as the banking industry, left a lot of loose ends.

Abernathy says the association has had some preliminary talks with congressional officials regarding potential changes, but has decided to suspend those discussions until a new Congress is seated next year.

The payday lenders will certainly be there, too. How, or if, the bankers and payday industry can separate and defend their overlapping interests will be interesting.