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Payday loan rate cap aims to help service members

August 6, 2006 - Kansas City, Missouri

An impressive alliance of 70 consumer and veterans groups is supporting a congressional amendment to protect military personnel and their families from potential predatory loans.

The groups say the proposal by Sen. Jim Talent, a Missouri Republican, and Sen. Bill Nelson, a Florida Democrat, will guard military personnel against 300 percent payday loans that can ensnare their families in webs of debt and create financial stress and reduce their military readiness.

Talent's amendment would cap interest rates on payday loans to military personnel at 36 percent a year. Some states, including Kansas, already place a similar cap on small, short-term loans. Consumer and veterans groups say payday lenders focus on young, low-paid and often financially naive service members by clustering around military bases.

But this is not an easy issue. It has become entangled in election year politics and controversy that hamper a pretty good first step toward reining in the growth of abusive loans.

Payday loans are usually two-week loans that many consumers, short on cash, use to get by from one payday to the next. They can be useful in a pinch to pay a gas bill. But they can be renewed over and over, and many unwary consumers get mired in mounds of debt carrying exorbitant interest rates.

Claire McCaskill, Talent's Democratic challenger, contends the 36 percent cap is too high to provide any serious protection. Her representatives claim Talent's intent is to give a competitive edge to a constituent company, Kansas City-based Pioneer Services, that influenced the amendment's language.

Pioneer is one of the nation's biggest short-term lenders to military personnel. It already caps its loans at 36 percent. But it's also been criticized for its practice of charging high fees for add-on products, such as credit insurance, which boosts the amount and interest paid on short-term loans.

Payday loan officials also grumble the bill favors Pioneer. They claim the bill will dry up the only source of short-term loans for consumers who don't qualify for normal bank loans.

Steven Schlein, a spokesman for the Community Financial Services Association, a payday trade group, said a 36 percent annual interest rate works out to a $1.35 charge on a $100, two-week loan -- far less, he said, than it costs to service the loan. "The industry couldn't stay in business," he said.

But Joe Freeman, chief lending officer for Pioneer, said in an e-mailed statement that the bill neither hurts nor helps his company. "It seems to me the only ones against this bill are the predatory lenders in the payday loan industry," he said.

Despite the controversy, it's hard to ignore the support for the bill from every major consumer and veterans group.

"The legislation is rational, it's well founded, and there is no language carving out special favor for any company," said Kimberly Warden, vice president of federal affairs for the Center for Responsible Lending in Washington, D.C., a nonpartisan research center on consumer finances.

Jean Ann Fox, director of consumer protection for the Consumer Federation of America, said service members are especially vulnerable to predatory lenders. They are often young, lack financial training, live far from home and make little pay to support their families. "They aren't going anywhere, and they have to pay their debts," she said.

Under the military code of justice, service members who don't manage their debts can also face serious disciplinary actions that include, in the worst cases, a court-martial.

Industry officials say only a small percentage of military personnel take out payday loans. But military officials say a Pentagon report, expected to be released any day, will suggest the potential that high-interest loans can distract service members from doing their jobs and affect their military readiness.

"I think the report will carry more credence on the issue," said Michael F. Hayden, a retired Air Force colonel and the deputy director of government relations for the Military Officers Association of America. "We think 36 percent is high. But it is a much better starting point for a cap than these 300 percent rates."

The Talent and Nelson proposal amends the defense authorization bill (Senate Bill 2766). It is in conference committee.

News Source

Kansas City Star, Paul Wenske, Staff Writer

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