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«OHIO STATE LAW JOURNAL VOLUME 66, NUMBER 4, 2005 Predatory Lending and the Military: The Law and Geography of “Payday” Loans in Military Towns ...»

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Scam artists... have developed a talent for effectively targeting distinct groups of consumers for their sales pitches. Unfortunately, military consumers are considered particularly vulnerable by many of these companies....As a result, military consumers are not only subjected to the same deceptive acts and practices as consumer in general; they are also specifically targeted by unscrupulous companies.

Id. Diana B. Henriques, Deepening Debate on Soldiers and Insurers, N.Y. TIMES, Sept. 8, 2004, at C1 (discussing overpriced insurance sold to military personnel); Tom Philpott, Military Update: First Command Investors Eligible for Restitution, STARS & STRIPES, Jan.

22, 2005 (discussing Securities and Exchange Commission settlement of fraud and securities law violations).

10 CBSNews.com, New Enemy for U.S. Troops: Debt, Dec. 17, 2003, http://www.cbsnews.com/stories/2003/12/17/national/printable589033.shtml.

11 Editorial, Loan Businesses Prey on Troops, ST. PETERSBURG TIMES (Fla.), Dec. 12, 658 OHIO STATE LAW JOURNAL [Vol. 66:653 discussed a growing chorus of complaints that payday lenders charge exorbitant and unfair prices to unsuspecting and desperate military borrowers.12 These critics have pointed to anecdotal evidence suggesting that payday lenders have identified the armed forces as a profitable market to exploit, leading to hardship on military families.13 Some military officers have agreed, going so far as to complain that payday lenders are eroding military readiness by undermining troop morale.14 These officers believe that payday lenders sabotage all of the expensive programs and services designed to preserve the quality of life for members of the armed forces.15 For their part, payday lenders say they are helping their debtors out of short-term cash problems at an affordable price.16 Payday lenders emphasize that their customers borrow voluntarily and they accuse their critics of paternalism.17 Still, fearing a public relations nightmare, 2004, at 2P (“Not far outside the gates of many military bases lurks a predator lying in wait for unwitting troops to make a mistake. These are not terrorists but storefront businesses that offer financially naive troops quick loans at unconscionably high interest rates.”); MARK


FAMILIES AND THE U.S. ARMED FORCES 4 (July 2003) (quoting former Joint Chiefs of Staff member Admiral J. L. Jonson) (“‘There can be no question that military families are among the “targeted group.” A preponderance of payday lenders and cash advance offices are located in the immediate vicinity of our military bases.’”).

12 Diana B. Henriques, Seeking Quick Loans, Soldiers Race Into High-Interest Traps, N.Y. TIMES, Dec. 7, 2004, at A1 (“Hardships... are becoming more common in the military as high-cost easy money lenders increasingly make service members a target market. As a result, many military people have become trapped in a spiral of borrowing at sky-high rates that can ruin their finances, distract them from their duties and even destroy their careers.”).

The New York Times article also features preliminary results of the study presented in this Article, including a graphic reproducing of the author’s map of Ft. Lewis and McChord Air Force Base in Washington. Id. See also Loan Businesses Prey on Troops, supra note 11 (editorial condemning payday lending to military personnel highlighting preliminary results of research presented in this Article).

13 Senator: Borrowers Trapped by ‘Payday’ Loans, High Interest, JEFFERSON CITY NEWS TRIB. (Jefferson City, Mo.), Dec. 28, 1999, http://newstribune.com/articles/1999/12/28/export151440.txt [hereinafter Borrowers Trapped] (“Navy Capt. Robert W. ‘Andy’ Andersen calls it a ‘financial death spiral’ in which strapped sailors get short-term, high-interest ‘payday loans’ and fall into a cycle of borrowing and debt.”).

14 See Tom Shean, Payday-Loan Bill Draws Criticism from Military: Effort to Regulate High-Interest Loans Would Backfire, They Say, VIRGINIAN-PILOT (Norfolk, Va.), Feb. 16, 2002, at D1.

15 Payday Loans: The High Cost of Borrowing Against Your Paycheck, ARMY LAW., Feb. 2001, at 23 [hereinafter The High Cost of Borrowing]; Debbie Rhyne, Aid Fund Offers Help to Military Personnel, Families, MACON TELEGRAPH, Dec. 29, 2001, at B1.

16 See Doug Bandow, Those Misguided Payday-Loan Critics, SAN DIEGO UNION-TRIB., Mar. 25, 2004, at B11.

17 Chris Johnson, Vice President Urgent Money Service, Letter to the Editor, 2005] PREDATORY LENDING AND THE MILITARY 659 payday lenders and their trade associations have vociferously denied targeting military personnel.18 This Article attempts to ascertain whether payday lenders do in fact target members of the armed services. Employing analytical tools of the emerging interdisciplinary law and geography movement, this study compares the payday lender storefront locations in military towns across differing state legal regimes.

Moreover, this Article describes and evaluates the different legal strategies that the federal and state governments have used to curtail perceived social problems associated with payday lending. In particular, we examine whether differing state legal approaches may have affected the extent to which payday lenders target military personnel. Our study systematically surveys 20 states, 1516 counties, 13,253 ZIP codes, nearly 15,000 payday lenders, and 109 military bases. We conclude that (1) there is irrefutable geographic evidence demonstrating that payday lenders are actively and aggressively targeting U.S.

military personnel, and (2) all state legal strategies except for aggressive criminal prosecution of usury laws have been ineffective in deterring this commercial behavior. Our interdisciplinary use of law and geography should serve as a realist check on pure legal reasoning and unfounded faith in the efficacy of our existing legal strategies.

Part II of our Article describes the payday lending industry, frames the background of financial vulnerability facing past, current, and future military personnel, and introduces the emerging debate over payday lending to military personnel. Part III introduces leading law and geography theory and summarizes our empirical methodology. Part IV juxtaposes our empirical description of payday lender location strategies near U.S. military bases with descriptions of the payday lending legal environment in force at each location. Part V analyzes the results of this study, ultimately drawing descriptive and prescriptive conclusions for policy makers, including state and federal law makers, as well as military leaders.

GREENSBORO NEWS & REC., Jan. 7, 2002, at A6 (“I’m sure it’s easy for you to sit in your office and tell your readers how ‘bad’ payday lenders are. We offer a service, plain and simple.... Our customers like our service. If they didn’t, they wouldn’t use us, plain and simple.”).

18 Paul Fain, The Few, the Proud, the Indebted: Payday Loan Shops Are Drawing Fire from the Military’s Top Brass, MOTHER JONES, May-June 2004, at 19.


–  –  –

Payday loans are high interest rate, rapidly compounding loans meant to tide over cash-short borrowers until their next paycheck.19 In a typical transaction, a customer might borrow $200 by writing a check drawn on her personal checking account and made out to the lender for $235.20 Typically, the borrower “post-dates” the check by writing a date one or two weeks in the future.21 This date is the day that the parties agree the borrower will repay the loan and interest. Before making the loan, payday lenders generally verify the debtor’s identity by asking for documents or identification such as a driver’s license, recent pay stubs, bank statements, car registration, or telephone bills.22 Many lenders telephone the borrower’s human resource manager or boss to verify the borrower’s employment.23 Virtually all lenders require the names, addresses, and telephone numbers of close family and friends in the event that the borrower skips town.24 Payday lenders usually decide whether to issue a loan on the spot without obtaining a credit report.25 Both parties are aware that the borrower’s checking account does not have sufficient funds to cover the check when the check is signed.26 The assumption is that the borrower will have deposited sufficient funds in her checking account to cover the check before the due date of the loan. After the paperwork is complete, the debtor walks away with $200 in cash or a check drawn on the lender’s account. When the two weeks are up, the debtor can redeem the check with cash or a money order, 19 Payday loans go by many other names, including deferred deposit transactions, deferred presentment check cashing, post-dated check loans, and check loans. Jean Ann Fox, What Does It Take to Be a Loanshark in 1998? A Report on the Payday Loan Industry, 772 PRAC. L. INST./COM. 987, 989 (1998).

20 Some lenders are now replacing the use of checks with a borrower’s agreement to allow the lender to simply debit the borrower’s bank account on the due date of the loan.

Michael S. Barr, Banking the Poor, 21 YALE J. ON REG. 121, 149 (2004).

21 See Scott Andrew Schaaf, Note, From Checks to Cash: The Regulation of the Payday Lending Industry, N.C. BANKING INST. 339, 341–42 (2001).

22 Fox, supra note 19, at 989.

23 Christopher L. Peterson, Only Until Payday: A Primer on Utah’s Growing Deferred Deposit Loan Industry, UTAH B.J., Mar. 2002, at 16.

24 Id.

25 Fox, supra note 19, at 990.

26 See id.; Deborah A. Schmedemann, Time and Money: One State’s Regulation of Check-Based Loans, 27 WM. MITCHELL L. REV. 973, 974–76 (2000).

2005] PREDATORY LENDING AND THE MILITARY 661 permit the check to be deposited, or attempt to renew the loan by paying another fee.27 If the borrower cannot pay off the loan, the obligation continues to accrue $35 in interest every two weeks. Although the initial $35 fee represents only 17.5% of the loan amount, the annual percentage rate of the transaction is around 455%.

A 455% interest rate is by no means uncommon.28 Studies by state governments, scholars, and consumer advocates generally indicate that average payday loan rates range from 364% to 550%. A consumer advocate coalition study surveying lenders in nineteen states and the District of Columbia found an average interest rate of 474%.29 Other regional data tend to roughly confirm this figure. For instance, the Indiana Department of Financial Institutions survey found that the average Indiana payday loan interest rate was 498.75%.30 North Carolina consumers purchase about 63% of their payday loans at annual interest rates between 460.08% and 805.15%.31 A recent report on Oklahoma payday lenders may suggest a slightly lower average APR of around 364.47% in that state.32 A report on payday lenders in Salt Lake City showed an average rate of 528.49%.33 Still, some lenders charge rates far in excess of these averages. For example, Indiana regulators found one lender offering payday loans at an interest rate of 7600%.34 Moreover, these interest rates do not include common contingent charges, including late fees and bounced check fees, which can cost nearly as much, or even more, interest as the loan itself.

Payday lenders argue that quoting an annual percentage rate for a two-week loan is misleading and unhelpful.35 Instead, payday lenders prefer to quote loan 27 Fox, supra note 19, at 990.


COST CREDIT MARKET 10–11 (2004).



1999), http://www.in.gov/dfi/legal/paydaylend/Payday.pdf [hereinafter IND. DEP’T OF FIN.



LENDING, Feb. 22, 2001, at 3 (N.C. Feb. 22, 2001).

32 A survey of payday loans registered in a database required under Oklahoma law suggested an average payday loan principal of $307.59 with an average fee of $43.


PROGRAM 4 (Dec. 2004), http://www.veritecs.com/OK_trends_12_2004.pdf [hereinafter OKLAHOMA TRENDS]. Assuming a fourteen-day repayment period, these figures suggest an APR of 364%.

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