Professors' research sparks payday loan reforms
November 4, 2006 - Gainesville, Florida
Payday loan companies, which often charge annual interest rates well into the triple digits, cluster around military bases, according to a study co-authored by University of Florida associate law professor Christopher Peterson.
But that may soon change.
Earlier this fall, a Pentagon report -- which cited Peterson's study -- prompted federal legislation that caps annual interest rates on consumer credit loans, including payday lenders, to 36 percent for military personnel and their spouses. This compares to current payday loan interest rates that often exceed 400 percent.
"I'm very satisfied to have my research contribute, albeit in a small way, to some positive change in our legal system," said Peterson, who testified in front of the Senate Banking, Housing and Urban Affairs Committee in September on his findings.
Payday loan companies specialize in short-term, high-interest loans that are usually due by the borrower's next paycheck. They're also called cash-advance loans, check-advance loans, post-dated check loans or deferred-deposit-check loans.
Peterson and Steven Graves, an assistant professor of geography at California State University, surveyed more than 13,000 ZIP codes nationwide and found that more payday lenders were concentrated in ZIP codes with a military base than nonmilitary ZIP codes with similar population and demographic makeups.
Peterson said military bases are targeted by payday lenders because they are filled with junior enlisted personnel, who often have little experience managing money and low but consistent salaries.
"They're also easy for the payday loan companies to track," he said.
In a typical payday loan, a borrower is charged $15 to $18 per $100 loan for two weeks with the average loan being $350, according to the report. Sometimes the borrower writes a post-dated check.
The catch comes if the borrower is unable to repay the loan by the time it's due. This causes the borrower to refinance the loan by borrowing more money on the same terms, known as a rollover. The annual interest rates usually span between 390 and 780 percent with the average borrower paying back $834 for a $350 loan.
While such lending practices are illegal in 11 states, they are allowed in Florida with some regulations.
An estimated 10 percent to 20 percent of soldiers, usually young and low ranking, at the Naval Air Station in Jacksonville often "fall prey to predatory lenders," said Bill Kennedy, director of the Mayport Navy-Marine Corps Relief Society, a nonprofit organization that provides financial, educational and other assistance to members of the U.S. naval services.
Kennedy said he has seen sailors come in with up to 14 payday loans. One solider, he said, started with a $500 loan and owed to $940.
"I have never yet seen a military service member that said he was glad he borrowed from a payday lender," he said. "They're a nervous wreck, and it's disruptive to the family. It puts them in a situation with spiraling debt where they can't pay their rent or make their car payment."
But Steven Schlein, a spokesman for Community Financial Services Association of America, the payday lenders' trade group, said it isn't fair to compare short-term credit on an annual percentage rate bases. He said a maximum annual interest rate of 36 percent reduces the lender's fee from about $15 per $100 loan to $1.38.
This isn't enough for lenders, who will stop issuing loans to service members, Schlein said. He added that military personnel make up only a small percentage of their clientele.
"People who criticize us fundamentally misrepresent or don't understand short-term credit," he said. "The only thing that is going to happen is that military personnel will have to take out longer, four-month loans that they don't want."
The loan interest-rate cap begins in October 2007 as mandated by a provision in the 2007 defense authorization bill and does not include anyone outside of the military.
The Gainesville Sun, Sarah Wood, Special Writer for the Sun
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