«OHIO STATE LAW JOURNAL VOLUME 66, NUMBER 4, 2005 Predatory Lending and the Military: The Law and Geography of “Payday” Loans in Military Towns ...»
For those bases mapped at the neighborhood level, we analyzed data in a manner we hoped would show differences in the prevalence of payday lending close to and far away from a given base. In these analyses we adopted two spatial categories: neighborhoods were “near” a base when they were located within a three-mile radius of the base, while “distant” neighborhoods were outside the three-mile zone. We chose the three-mile radius following the industry’s own commonly agreed-upon store location goals.296 In several maps presented later, we used mapping software to draw buffer zones one, two, and three miles around each base. Then we counted the number of people, payday lenders, and banks both within and outside the three-mile buffer zone.297 “Near base” census tracts could then be statistically measured against those outside the three-mile buffer. Near base tracts could also be measured against countywide and statewide averages. Statistical measures employed at the neighborhood level included the absolute number of payday lenders and banks and the density of payday lenders and banks per capita. These near base statistical analyses provide a useful quantitative snapshot of the landscape immediately surrounding military service members.
⎛∑L⎞ X =⎜ ⎜ P⎟ × p ⎟ ⎝∑ ⎠ where X is the expected number of payday lenders in a given county, ZIP code, or other geographic region; L is all payday lenders statewide; P is the population statewide; and p is the population of the county, ZIP code, or other geographic region in question.
296 For example, Check Into Cash explained its store location threshold in an SEC
Management believes that most consumers reside within a five-mile radius of the store that they visit and that the convenience of a store’s location is extremely important to customers. As a result, management seeks to open each new store within three miles of the market area that it is intended to serve.
Check Into Cash S-1 Registration Statement, supra note 282, at 33.
297 We estimated population totals within each buffer zone by summing the population of all census tracts with a centroid point inside the selected buffer zone.
704 OHIO STATE LAW JOURNAL [Vol. 66:653
A. Federal Banking Law and the Marquette Doctrine: A Backdrop to American Payday Lending The law and geography of payday lending to military personnel in individual states cannot be understood without an appreciation of federal banking law in general and the landmark case of Marquette National Bank v.
First Omaha Service Corp. in particular.298 The Marquette decision interpreted a Civil War era congressional statute called the National Bank Act.299 When Congress passed the National Bank Act in the 1860s, states and the federal government were competing aggressively for regulatory and tax control over the emerging American banking industry.300 Banks could (and still can) receive their charters either from state governments or from the federal government.301 Both the states and the federal government were actively encouraging banks to choose charters from their own level of government.302 In order to entice banks to charter at the state level, some states passed laws allowing state banks to charge higher interest rates than federal chartered banks lending within that state’s borders.303 Claiming unfair discrimination against federally chartered banks, and fearing encroachment on its tax and regulatory power, Congress drew on its authority under the Commerce Clause of the U.S. Constitution to prohibit states from authorizing higher permissible interest rate caps for state banks than for federal banks.304 Over a hundred years later, the growing credit card industry in the 1970s 298 Marquette Nat’l Bank v. First Omaha Serv. Corp., 439 U.S. 299 (1978).
299 Id. at 310 n.23.
300 James J. White, The Usury Trompe l’Oeil, 51 S.C. L. REV. 445, 450 (2000).
301 Elizabeth R. Schiltz, The Amazing, Elastic, Ever-Expanding Exportation Doctrine and Its Effect on Predatory Lending Regulation, 88 MINN. L. REV. 518, 540 (2004).
302 White, supra note 300, at 450.
303 See, e.g., Tiffany v. Nat’l Bank of Missouri, 85 U.S. (18 Wall.) 409, 411 (1873) (discussing state law which provided an eight percent interest rate cap for state banks and a ten percent cap for all other lenders).
304 The statute, now referred to as section 85 of the Act, allows national banks to
interest at the rate allowed by the laws of the State, Territory, or District where the bank is located... and no more, except that where by the laws of any State a different rate is limited for banks [of issue] organized under State laws, the rate so limited shall be allowed for [national banks] organized or existing in any such State....
National Bank Act, ch. 106, § 30, 13 Stat. 99, 108 (1864) (codified as amended at 12 U.S.C.
§ 85 (2000)).
2005] PREDATORY LENDING AND THE MILITARY 705 forced the Supreme Court to face a novel question. The issue was which state’s interest rate cap applies when a bank located in one state loans money across borders at an interest rate in excess of the state interest rate cap where the borrower lives. The Marquette Court held that the National Bank Act—which originally leveled the playing field between federal and state banks—now authorized federally chartered national banks to export the interest rate cap (or lack thereof) of a bank’s home state to consumers in other jurisdictions.305 The Supreme Court’s intervention in what had been state lawmaking was the starting gun in a corporate race to the bottom that significantly eroded the power of state governments to set meaningful interest rate caps.306 Lenders quickly relocated in states with no interest rate caps such as Delaware and South Dakota and exported those laws to states that chose more aggressive price regulation.307 States with interest rate caps became much more amenable to removing them in order to hold on to their financial services industry jobs.308 Because the Marquette decision only applied to national banks, state chartered banks were at a significant competitive disadvantage.309 Bowing to pressure by state banks, Congress included language in the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA) that allowed state banks to charge interest at the rate allowed by the laws of the state where the bank is located.310 Section 521 of this act granted exporting powers to state banks similar to those of national banks.311 The extent to which the Marquette decision (for national banks) and § 521 of DIDMCA (for state banks) applies to payday lending currently remains in flux. Payday lenders, at least some of whom have always sought new ways to circumvent state interest rate caps, began attempting to use the Marquette exporting doctrine to their advantage in the 1990s.312 In general, banks were unwilling to risk their own reputations by offering triple-digit interest rate loans out of their own branch lobbies in their own communities. However, a small minority of banks were willing to form business relationships to make payday loans through storefront payday companies usually located in other states. In 305 Marquette Nat’l Bank v. First Omaha Serv. Corp., 439 U.S. 299, 310–12 (1978).
306 William F. Baxter, Section 85 of the National Bank Act and Consumer Welfare, 1995 UTAH L. REV. 1009, 1010–11; Schiltz, supra note 301, at 619–20.
307 White, supra note 300, at 447–48.
308 Id. at 454.
309 Schlitz, supra note 301, at 565–66.
310 Depository Institutions Deregulation and Monetary Control Act of 1980, Pub. L. No.
96-221, § 521, 94 Stat. 132 (1980) (codified at 12 U.S.C. § 1831(d)(a) (2004)).
311 Hill v. Chemical Bank, 799 F.Supp. 948, 951 (D. Minn. 1992) (“Congress enacted § 521 to create parity between national and state banks with respect to usury limitations.”).
312 CONSUMER FEDERATION OF AMERICA & U.S. PUBLIC INTEREST RESEARCH GROUP,supra note 153, at 12–15.
706 OHIO STATE LAW JOURNAL [Vol. 66:653 these transactions, which have become standard in the industry, the payday loan company manages marketing, staff, locations, customer service, and loan applications, but the bank advances the loan funds to borrowers. On paper, every loan is “made” by the bank, but the name on the door is that of the payday loan company, and the only person the borrower ever sees is an employee of the payday lender.313 By prior agreement, the payday loan company usually then immediately purchases the right to receive payment from consumers back from the bank.314 Then, the payday loan company goes on to handle the most important aspect of the business: collections. The bank, in effect, “rents” its charter powers under the Marquette doctrine or § 521, either in exchange for a per loan fee or for ownership in a small percent of the proceeds of each loan.315 The entire point of the business relationship is to circumvent interest rate caps adopted by state legislatures.316 Not surprisingly, many bankers and bank regulators were extremely uncomfortable with these “charter-renting” relationships. In 2002, the Office of the Comptroller of the Currency (OCC) used its oversight powers over federally chartered banks to crack down on charter-renting. Speaking on the Marquette
doctrine, the Comptroller of the Currency explained:
Let me raise one... caution.... The benefit that national banks enjoy by reason of this important constitutional doctrine cannot be treated as a piece of disposable property that a bank may rent out to a third-party that is not a national bank. Preemption is not like excess space in a bank-owned office building. It is an inalienable right of the bank itself.
Indeed, the payday lending industry has expressly promoted such a “national bank strategy” as a way of evading state and local laws. Typically, these arrangements are originated by the payday lender, which attempts to clothe itself with the status of an “agent” of the national bank.
Not only do these arrangements constitute an abuse of the national charter, but they are highly conducive to the creation of safety and soundness problems at the bank, which may not have the capacity to manage effectively a multistate loan origination operation that is in reality the business of the payday
lender.317 Following this reasoning, one by one, the OCC gave negative oversight evaluations to every federally chartered bank involved in payday lending.318 Under threat of losing their bank charters, all national banks terminated their charter-renting relationships with payday loan companies.