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Extend loan interest cap to all, lawmaker says

December 7, 2006 - Washington, D.C.

Two months after Congress approved a cap on loan interest rates for service members, lawmakers are urging financial institutions to look for ways to make affordable small loans available to all consumers, not just the military community.

Rep. Barney Frank, D-Mass., incoming chairman of the House Financial Services Committee, said Wednesday that "payday loans" and other high-cost loans affect many Americans, particularly those with low incomes. Frank spoke at a conference hosted by the Federal Deposit Insurance Corporation to review options for affordable, responsible loans for the military community.

Congress recently passed a law limiting interest rates to 36 percent on payday loans and other consumer loans made to military personnel and their families. Such loans have been a persistent source of financial problems in the military community, especially among junior troops who may have to roll the loans over when they are unable to repay on time -- at annual interest rates of 400 percent or more.

The FDIC convened the conference to address the "pervasive need for more responsibly priced small-dollar loans," said Sheila Bair, chairman of the FDIC.

Frank said he intends to work with Bair and others "to go beyond the military community and reach out to others" to address the issue of high-cost loans.

Low-income customers go to payday lenders and similar establishments rather than traditional banks or credit unions for a variety of reasons. The banking system, as it stands now, is "underutilized by the lowest-income people in our country," Frank said.

But banks are not the problem, he said. "It's the lack of sophistication, and fear that keeps people out. Here's a chance for people in the banking system to dispel some unfair myths."

The model for providing some affordable loan alternatives for military families could be used to extend banking services to all lower-income people, he said.

The Defense Department has reported that high interest loans can leave service members deep in debt, and can cause family stress and other problems that snowball into readiness issues for the military services. "All of us -- regulators and members of the banking community -- have a duty to help these individuals and their families develop alternative, affordable options so they can meet their credit needs," Bair said. "These alternative products could be used to address an immediate financial need or simply to help them regain their financial footing."

Banks have the ability to create a variety of affordable loans, along with savings plans, to meet the needs of the military community, she said, noting that a number of military banks already are offering these loans.

For example, Armed Forces Bank, which provides on-base banking services for 34 military communities in 17 states, offers a loan program that is an alternative to payday loans. The loan amounts generally are limited to one month's pay, said Don Giles, president and chief executive officer. Troops can take up to 24 months to repay, and the annual percentage rate is 18 percent.

They decided they needed a payday loan alternative in 2003, Giles said, after realizing how many check cashers were coming into their branches on payday, bringing checks from their customers. Since then, Armed Forces Bank has made about 12,000 loans totaling more than $13.5 million.

But even with a reasonable interest rate and a cap on loan amounts, about 20 to 25 percent of borrowers still default on their loans, he said.

Frank acknowledged the risk that a larger number of borrowers of small loans won't repay them. In dealing with that issue, he cautioned banks to beware of making low-income borrowers who do pay back their loans bear higher costs to make up for those who don't repay. "That's a problem . . . that's not fair," Frank said. "Why should poor people who pay back subsidize other poor people who won't pay back?"

News Source

Marine Corps Times, Karen Jowers, Staff Writer

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