payday loan industry watch : news story : Pentagon backs effort to cap interest rate on 'payday loans'

The Pentagon has thrown its support behind a federal initiative to cap the annual interest rate of so-called "payday loans" to military personnel at 36 percent.

In a report to Congress, the Pentagon calls for a "federal ceiling on the cost of credit to military borrowers ... to prevent any lenders from imposing usurious rates" and calls for the same 36 percent cap.

Washington lawmakers are trying again this year to make the initiative a federal law by proposing an amendment to the Defense Authorization bill. Similar interest-rate caps proposed in Congress in recent years have failed.

The Pentagon study, which called for federal controls as well as improved education programs, cited an example of an E-4 airman who obtained a $500 payday loan and wound up taking out more and more loans to cover what she owed. Total cost to pay off the payday loans: $12,750.

The Center for Responsible Lending estimates active-duty personnel are three times more likely than civilians to take out payday loans.

"When you look outside any [stateside] military installation, you'll see a lot of the check cashing stores or car title loan companies," said Joyce Raezer, director of government relations for the National Military Family Association in Virginia.

Payday loans are small cash advances, in which borrowers usually give lenders postdated personal checks or authorization for automatic bank withdrawals. In return for loaning the cash, lenders charge fees or higher interest rates, according to the Web page for the Center for Responsible Lending, a Washington, D.C.-based consumer research center.

NMFA and roughly 70 consumer and veterans groups put their support behind the congressional amendment, introduced by Sen. Bill Nelson, D-Fla., and Sen. Jim Talent, R-Mo. The bill now is in a House conference committee.

"Typically, the payday lending industry is regulated by the States. While some States have decided to regulate the industry and cap interest rates, others do not," said Ryan Brown, Nelson's spokesman.

Military services are educating members and their families to the dangers. The Armed Forces Disciplinary Control Board can declare a lender off-limits, but can do nothing if a lender abides by state laws, the report states.

While working as a civilian photographer in Las Vegas, Shaun Knittel once needed fast cash to float his bills from one paycheck to the next. So he opted for a payday loan.

"I did that -- once," said Knittel, now serving in the U.S. Navy overseas. He saw others who took out the loans dig themselves deeper into debt -- "basically, trading one debt for another," said the 26-year-old sailor.

But Steven Schlein, a spokesman for the Community Financial Services Association, said the legislation would likely discourage lenders from loaning to servicemembers -- because it wouldn't be profitable -- and push those borrowers toward unregulated Internet lenders.