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On payday, many GIs pay back

September 10, 2006 - Washington, D.C.

Six months ago, John Elliott, a sailor based at Norfolk Naval Station, was having trouble keeping up with his bills, so he went looking for a quick source of cash to tide him over.

He took out what's known as a payday loan, borrowing against future paychecks in exchange for money on the spot.

Elliott borrowed a total of $1,600 from four lenders, but the high fees he was charged each time he took out or renewed his loans made them hard to pay off. In another six months, his debt could balloon to as much as $4,480.

"I thought I would pay it off in a couple of months," he said. "It's taken longer than I thought."

Elliott's experience of a short-term loan turning into a long-term liability is a familiar scenario to payday customers, many of whom live from paycheck to paycheck and have little access to other forms of credit. A Defense Department study published last month found that members of the military use payday loans three times as often as civilians.

To get a payday loan, all a borrower needs is a checking account and a pay stub. There is no credit check. The borrower simply hands over a post-dated check for the amount of the loan plus fees or gives the lender authorization to automatically withdraw money from a bank account.

But the fees can be high, averaging $15 to $30 for every $100 loaned. If a borrower does not pay back the loan by the next payday, the lender can deposit the check or take the money from the borrower's account. The borrower can also renew, or "roll over," the loan, incurring another round of fees. All told, such fees can add up to an annual percentage rate of 400 to 700 percent.

Though payday loans are supposed to be used for the occasional cash crunch, many customers repeatedly renew or "roll over" their loans. Studies by bank regulators in Iowa, Illinois and Indiana found that payday customers renewed loans an average of 10 to 13 times in one year.

Consumer groups say the way the loans are structured makes it easy for low-income earners to get in over their heads. "These are loans made without regard to ability to pay to people who have trouble making ends meet," said Jean Ann Fox, director of consumer protection for the Consumer Federation of America.

Payday loans have caught the attention of Pentagon officials and members of Congress, who worry that the high fees contribute to financial problems among military personnel.

Severe Consequences

While it's bad enough for a civilian to fall deeply into debt, the consequences for members of the military can be far more severe, including the loss of security clearance or a court-martial. Those consequences make military personnel the perfect clients for payday lenders because they have extra incentive to pay back loans, Fox said.

"How [service members] manage their finances is important to their careers and their security clearances," she said. "They will keep a loan afloat at all lengths."

In the Navy, security clearances are being revoked or denied for financial reasons at eight times the rate they were four years ago. The Pentagon has asked Congress to limit what payday and other lenders can charge active-duty military personnel to an annual percentage rate of 36 percent. The cap would include all fees.

The payday lending industry is fighting the cap, saying it would cut service members off from a much-needed source of credit and drive them to less regulated alternatives, such as offshore Internet lenders.

Department of Defense officials, however, feel the need to act, as payday lending storefronts have clustered near large military installations around the country. Locally, for example, there are six payday lenders outside Fort Belvoir in Fairfax County.

What attracts payday lenders to bases, the Defense Department report said, are thousands of young, financially inexperienced service members who have bank accounts and steady jobs but little savings and, often, flawed credit.

"They use the payday lenders because they're ever-present," said Sen. James M. Talent (R-Mo.), who is pushing for the 36 percent cap. "You can't go 100 yards off a base without running into one."

The Senate Banking Committee will hold a hearing Thursday on the Pentagon report's findings.

Under the proposed limit, the fee on a $100 payday advance would be $1.38, or less than 10 cents per day. That's not enough for a payday lender to pay its costs for making the loans, according to Lyndsey Medsker, a spokeswoman for the Community Financial Services Association of America, a national trade association representing payday lenders. A 2005 study by the Federal Deposit Insurance Corp. reported that the cost to originate and service a payday advance of $245 is about $32.

The cap on loans to the military could have worse consequences for consumers, Medsker said.

"Prohibiting a service or eliminating one short-term credit option is not solving the problem that people still need access to short-term credit," she said.

Growth Industry

In the past six years, as banks have retreated from small loans, the number of payday lenders nationwide has more than doubled, to 22,000, according to estimates by investment banking firm Stephens Inc. The industry is dominated by about a dozen companies, such as Advance America, QC Holdings Inc. and Ace Cash Express Inc. Several of the companies are publicly traded.

Key to the industry's growth have been laws in 37 states and the District that allow them to operate under a variety of restrictions. The District, which passed such legislation in 1998, has about 30 payday lenders. The city caps loans at $1,000 and limits fees to $5 to $20, depending on the size of the loan.

Virginia limits fees to $15 for each $100 loaned, and borrowers are allowed to prepay loans without a penalty. The volume of short-term, high-interest loans made in Virginia last year topped $1 billion, according to state banking regulators.

Maryland is one of several states, including Pennsylvania, New York and West Virginia, that ban payday lending through small-loan or anti-usury laws.

Payday lenders have tried to get around interest rate caps and other state restrictions by partnering with banks chartered in places, such as Delaware, that don't limit interest rates and are regulated by the FDIC. But the agency last year imposed tougher rules on banks that partner with payday lenders, making it unprofitable for many to continue.

In the four years since Virginia allowed payday lending, the number of lenders has grown to about 750. Around the Norfolk Naval Station, storefront lenders proclaiming "fast cash" and "we make cash come alive!" can be found along several main drags about two miles from the main gate. They're joined by pawn shops, car title lenders and rent-to-own businesses with signs in the window offering "military credit."

The larger Hampton Roads area is home to seven of the nation's 60 largest military installations and one of the largest concentrations of payday lenders, according to a study published last year by Steven M. Graves, a geography professor at California State University at Northridge, and Christopher Peterson, a law professor at the University of Florida. Graves and Peterson concluded that it was statistically impossible for the concentration of payday lenders around military bases to be the result of random chance.

Payday lenders say they do not target military members, who contribute a mere 1.3 percent of the industry's annual revenue. On its Web site, the CFSA called the Defense Department report "nothing but a re-hash of flawed data, biased analysis and anti-business philosophy pushed by fringe activists."

CFSA spokeswoman Medsker said the Graves-Peterson study, which relied on state licensing data, did not distinguish among types of payday lenders and lumped together CFSA members, which represent about two-thirds of the industry, with non-CFSA lenders. CFSA members, Medsker said, are required to adhere to a set of best practices that include not contacting military commanders to collect debts.

Emergency Relief

Military personnel who are strapped for cash have options other than payday lenders. They can turn to relief societies that provide financial assistance in the form of grants and interest-free loans. But those agencies face restrictions on what they can provide. Defense Department surveys have also shown that members of the military find the societies' procedures cumbersome.

"There's a lot of paperwork. You got to wait. By the time you get it, you're in trouble," said Anthony Catalano, a sailor, as he was leaving a Cash Advance on Granby Street in Norfolk earlier this month.

A trip to the relief society also requires a referral from a ranking officer, whom service members often are reluctant to confide in about financial troubles.

"Most [soldiers] won't tell us. They're embarrassed. They're afraid and they won't get assistance," said retired Col. Dennis J. Spiegel, deputy director of administration for Army Emergency Relief.

"All they have to do is put a word in to your commanding officer, and that's enough to put the fear of God in you," said Matthew Hubbell, a Navy air traffic controller first class in Jacksonville, Fla. He first turned to payday lenders in the early 1990s to support his family of six after cancer forced his wife to stop working. Eventually, he found himself spending his paydays going from one payday lender to another to tend to his debts.

Hubbell finally went to his commanding officer after a payday lender threatened to contact his superiors.

"I thought it was the end of my career," he said.

His commanding officer surprised him, however, and helped him get credit counseling and a lawyer.

Hubbell is still paying off some of his loans, and his wife's cancer has returned. He's managed to keep his security clearance. But it's up for review later this year, and he's not sure it will be reapproved. Losing it could not only end his military career but also would probably keep him from getting a lucrative job in the civilian world.

"I'm not trying to tell people I'm completely blameless," Hubbell said. "I didn't realize the scope of it. It was like quicksand."

News Source

The Washington Post, Annys Shin, Staff Writer, with Andrea Caumont contributing

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