«OHIO STATE LAW JOURNAL VOLUME 66, NUMBER 4, 2005 Predatory Lending and the Military: The Law and Geography of “Payday” Loans in Military Towns ...»
762 OHIO STATE LAW JOURNAL [Vol. 66:653 estimates of its population vary from just over 10,000 to more than 20,000 personnel, many of whom are from branches other than the Army.438 Whiteman Air Force Base houses approximately 4000 service persons.
With sixteen payday lenders and just over 41,000 people, Pulaski County, home to Fort Leonard Wood, ranks eleventh of 115 counties in terms of the number and density of payday lending. Neighboring Laclede County ranks tenth in the state, despite its isolation in south-central Missouri.
438 Two sources from the DOD provide divergent estimates of troop levels at Fort Leonard Wood. The DOD’s Base Structure Report estimates roughly 20,000 troops and the DOD’s Directorate of Information, Operations and Reports estimates troops to be around 10,000. DEPARTMENT OF DEFENSE, supra note 284; DIRECTORATE FOR INFORMATION
OPERATIONS AND REPORTS, STATISTICAL INFORMATION ANALYSIS DIVISION WORK FORCEPUBLICATIONS (Fiscal Year 2004), http://www.dior.whs.mil/mmid/L03/fy04/ATLAS_2004.pdf.
2005] PREDATORY LENDING AND THE MILITARY 763 764 OHIO STATE LAW JOURNAL [Vol. 66:653 At the ZIP code level, the effect of the base on Fort Leonard Wood’s tiny gateway town is evident. Although St. Robert has only 5200 people, apparently enough to support only two banks, eight payday lenders have decided it is a good location—seven more than necessary according to statistical predictions.
Given the number and density of payday lending for this population, St. Robert is the second worst place in the state for this activity. While Whiteman Air Force Base has been somewhat spared of payday lenders, the tiny town of Windsor, less than five miles from the base on Route 23, has attracted as many payday lenders (four) as banks, thereby earning the town a ranking in the top 30 statewide for payday lending.
2005] PREDATORY LENDING AND THE MILITARY 765 766 OHIO STATE LAW JOURNAL [Vol. 66:653
11. New York
Proponents of the payday lending industry have thus far failed to sway the New York state legislature to their cause. Unlike most states with a significant military presence, New York has steadfastly stood by its criminal and civil interest rate caps. Except where authorized, New York’s civil usury law imposes a maximum interest rate of 16% per year.439 And New York also has a criminal usury law which makes lending at interest rates over 25% per annum a class E felony for first offenses, and a class C felony for subsequent offenses.440 To further reinforce the state’s prohibition against payday lending, New York expressly bars check cashers from advancing money on postdated checks and requires them to deposit any checks cashed within one business day.441 Regulatory authorities have also aggressively pursued payday lenders. The state banking department superintendent has unequivocally expressed disdain for banks that rent their charters, accusing them of abusing the public trust.442 Similarly, the New York Attorney General has accused a Delaware-chartered state bank of criminally facilitating evasion of New York’s usury laws.443 Nevertheless, the interaction between New York usury law and federal law preempting interest rate caps for banks presents an interesting legal puzzle. If payday lenders are correct in their argument that federal law legalizes “charterrenting,” then the Supremacy Clause of the U.S. Constitution, under this theory, would make payday lending as legal in New York as in other states.
We included New York in our sample both because it is home to Fort Drum, a relatively significant Army post located near the “military town” of Watertown, New York, and because of the state’s legal and financial importance. However, the regulatory climate in New York creates a challenging data collection problem. State authorities actively attempt to sue or prosecute businesses found to be engaged in payday lending, so authorities do not maintain a list of payday lenders. Similarly, payday lenders may not list their addresses or phone numbers in commonly available telephone directories or in 439 N.Y. BANKING LAW § 14-a (McKinney 2004); N.Y. GEN. OBLIG. LAW § 5-501.
440 N.Y. PENAL LAW §§ 190.40, 190.42 (McKinney 2004).
441 N.Y. BANKING LAW § 373 (McKinney 2004).
442 Elizabeth McCaul, Superintendent of Banks, Industry Letter on Payday Loans (June 13, 2000), http://www.banking.state.ny.us/lt000613.htm (“[B]anks that choose to offer this type of loan product at exorbitant interest rates are blatantly abusing [federal] authority.
These types of actions, when judged in the court of public opinion, can lead to a groundswell of outrage resulting in reputational harm and safety and soundness problems.”).
443 People v. County Bank of Rehoboth Beach, No. 1:03-CV-1320 (N.D.N.Y. May 25, 2004), www.abanet.org/buslaw/committees/CL230044pub/links.shtml (subscription required).
2005] PREDATORY LENDING AND THE MILITARY 767 any other business address database. A survey of directories in the Watertown, New York area near Fort Drum produced no listings for “Check and Cash Advances,” “Check Cashers,” or any other similar categories. In an effort to ensure that our data was as accurate and reliable as possible, we chose to conduct in-person field work at Fort Drum to verify the presence or absence of payday lending and/or businesses offering equivalent services. Our field work methodology was essentially a standard “windshield survey,” which involved driving the streets and highways of our target area, making note of and paying visits to establishments we suspect are making payday loans, and collecting address data and other useful information. In conducting our field work, we drove through all commercially-zoned areas within a five-mile radius of Fort Drum’s main gate and through every commercial district of nearby Watertown.
Our search focused not only on lenders openly offering payday loans, but also businesses offering payday loans disguised as other transactions.
Our field work revealed two outlets in the Fort Drum region offering the functional equivalent of payday loans under the common façade of “catalog sales.” 444 As discussed in Section II, catalog sales are a thin disguise aimed at illegally lending in excess of state usury laws. Subsequent to conducting our field work, the New York Attorney General’s office obtained a permanent injunction shutting down both of these lending operations, holding their owner personally liable for restitution.445 The Attorney General’s office has subsequently confirmed that these two payday lending locations near Fort Drum have now ceased operations.446 Combined with our field work, this verifies that unlike every other significant military installation in all 20 states we studied, there are essentially no payday lenders targeting military personnel in the Fort Drum area.447 The FDIC lists fifteen banks in Jefferson County, New York, the main home to Fort Drum. Based upon that statistic, this county ranks perhaps best of all the military counties in all 20 states included in our survey on all three counts: total number of payday lenders, per capita density, and ratio to banks.
444 See infra note 143 and accompanying text.
445 See People v. JAG NY, 794 N.Y.S.2d 488 (2005).
446 Telephone Interview with Mark D. Fleischer, Assistant N.Y. Att’y Gen. (Mar. 2, 2005).
447 Nevertheless, our field work did identify numerous other potential credit sources including traditional banks, credit unions, finance companies, rent-to-own furnishing stores, and pawn shops.
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12. North Carolina
North Carolina provides an interesting contrast to New York. In 1997, North Carolina enacted legislation authorizing payday lending. This statute was comparable to those in many states included in our study in that it created a statutory mechanism allowing payday lenders to obtain licenses authorizing them to charge fees of 15% of the face amount of a borrower’s check (an annual interest rate cap of 459%).448 However, the North Carolina legislature also included a four-year “sunset provision” on the special usury law. In August 2001, the legislature allowed the four-year experimental law to expire, despite venomous opposition by payday lenders.449 As a result, North Carolina law reverted to its traditional small loan law which caps the annual interest rate for small consumer loans at 36%.450 After 2001, payday lending became as illegal in North Carolina as it is in New York.
Nevertheless, nearly four years later, North Carolina has not been able to successfully stop payday lending in the state. Shortly after the payday lending law expired, state authorities began to order businesses to stop making payday 448 The 1997 law authorized payday loans that did not exceed a duration of 31days or an amount of $300. N.C. GEN. STAT. § 53-281(a), (b) (1997) (repealed 2001). It allowed lenders to charge interest of 15% of the amount of the face amount of the check the borrower used to borrow the money, or $17.65 for every $100 check. N.C. GEN STAT. § 53-281(d)(1997) (repealed 2001). Assuming an average loan duration of fourteen days, payday lenders used to be able to charge an effective annual interest rate of 459%.
449 See CENTER FOR RESPONSIBLE LENDING, N.C. PAYDAY LENDING: HISTORY OFPAYDAY LENDING IN N.C., http://www.responsiblelending.org/predlend_nc/payday.cfm (last visited Oct. 17, 2005). The legislature allowed the law to sunset because it was concerned with the consumer protection issues arising from it. From 1999 to 2000, for example, the number of payday lending companies increased by 16%, with revenues rising by 28% to more than $123 million. See Rick Rothacker, Researchers Call For Payday Lending Reforms, CHARLOTTE OBSERVER, Feb. 17, 2003, at 7D, http://www.charlotte.com/mld/observer/5198784.htm?1c. A study conducted by the North Carolina Banking Commissioner showed that 87% of North Carolina consumers rolled-over their loans at least one time with any given lender. OFFICE OF THE COMMISSIONER OF BANKS, REPORT TO THE GENERAL ASSEMBLY ON PAYDAY LENDING 6 (Feb. 22, 2001). Not counting debtors who borrowed from multiple locations, 38.3% of borrowers renewed their payday loan more than ten times. Id. About 14% of borrowers renewed their loans more than nineteen times a year with each lender. Id.
450 N.C. GEN. STAT. § 53-173(a) (2004) (imposing an interest rate cap of 36% for loans under $600, and a cap of 15% on any amount loaned from $600 to $3000). This interest rate cap is a component of the North Carolina Consumer Finance Act (NCCFA). Id. §§ 53-164 to 53-191. Small loans under the NCCFA are generally limited to a duration of about two to four years, but lenders may refinance loans if necessary. Id. §§ 53-181(a)(9), 53-180(a) (2004). Lenders can also charge a five percent fee no more than twice a year. Id. § 53a)(1) (2004).