«OHIO STATE LAW JOURNAL VOLUME 66, NUMBER 4, 2005 Predatory Lending and the Military: The Law and Geography of “Payday” Loans in Military Towns ...»
Payday lenders in Tennessee operate under the authority of the Deferred Presentment Services Act (DPSA).502 For each payday loan issued, the DPSA authorizes lenders to charge a fee equating to an annual rate of interest of 459%.503 However, the Act is clear that the fee is not to be deemed “interest for any purpose of law;” instead, the “fee” is considered compensation to cover a lender’s operating costs.504 As a result, the “fees” associated with payday loans under the DPSA avoid the state constitution’s usury provision prohibiting interest in excess of ten percent per year.505 In fact, the Act reinforces this notion by specifically exempting the fees charged for payday loans from control by “any other statute governing the imposition of interest, fees or loan charges,”506 including the State’s statutory limit of ten percent annual interest for loans of less than $1000.507 Loans may not exceed a duration of 31 days.508 After a payday loan is made, the lender may not renew or consolidate the loan with the proceeds of another payday loan made by the same lender.509 Tennessee has 1201 payday lenders which translates into 21.05 per 100,000 people.510 This gives Tennessee one of the highest rates of payday lending in the country, with several counties and ZIP codes ranking among the most densely populated with payday lenders in the country. Military installations in Tennesee include the Naval Support Facility in Millington and a small arsenal in Milan.
Montgomery County has 21 payday lenders for its 134,000 residents, including those on the base. In terms of total number of lenders, it ranks thirteenth among 502 TENN. CODE ANN. §§ 45-17-101 to 45-17-119 (2000).
503 Id. § 45-17-112(b)(1)-(2) (2000). Specifically, the DPSA authorizes lenders to charge a fee not exceeding the greater of 15% of the face amount of the check or $30. Id.
This means that a borrower who writes a check for $100 actually receives only $85, with the remaining $15 going to the lender as its fee; the borrower actually incurs a charge of 17.65%.
Consequently, assuming an average payday loan duration of fourteen days, this equates to an annual percentage rate of 459%.
504 Id. § 45-17-112(b)(2).
505 See TENN. CONST. art. XI, § 7.
506 TENN. CODE ANN. § 45-17-118 (2000).
507 Id. § 47-14-104(a).
508 Id. § 45-17-112(d) (2000).
509 Id. § 45-17-112(q).
510 STATE OF TENNESSEE, DEPARTMENT OF FINANCIAL INSTITUTIONS, LICENSEDDEFERRED PRESENTMENT LIST, http://www.tennessee.gov/tdfi/Lic_DP.html (last visited Oct.
798 OHIO STATE LAW JOURNAL [Vol. 66:653 Tennessee’s 95 counties, but in terms of per capita density, Montgomery ranks near the 50th percentile.
Because the most significant military population affecting payday lender location strategies is stationed over the border, the ZIP code level of analysis is most helpful. In Clarksville (ZIP 37042), near Ft. Campbell, there are ten payday lenders and nine banks. However, if one were to drive away from Fort Campbell into other parts of Clarksville, the ratio begins turning toward average. We found that in Clarksville’s other two ZIP codes there are eleven payday lenders and 34 banks.511 With at least 2000 military personnel, the Naval support facility near Millington is relatively large, but at only five percent of the population, the military does not attract a large number of payday lenders.
Millington itself has seven banks and six payday lenders, a ratio that would be alarming in other states, but in Tennessee, where payday lending is rampant, this ratio is not unusual and is about what one would expect on a per capita basis.
Immediately to the south are two ZIP codes (38127 and 38128), which together host 25 payday lenders close to the service members stationed at Millington.
ZIP code 38122, which is less than six miles from Millington, ranks second worst in our composite ranking of Tennessee.
511 For a street-level analysis of Fort Campbell, see Part IV.B.8 supra.
2005] PREDATORY LENDING AND THE MILITARY 799 800 OHIO STATE LAW JOURNAL [Vol. 66:653 The other high-ranking ZIP codes in Tennessee include a few county seats in Eastern Tennessee. Interestingly, the number one ZIP code in Tennessee is Chattanooga (ZIP 37412) which borders Georgia along Interstate 75, reminiscent of the Georgia border-town phenomena we observed in Alabama, South Carolina, and Florida.
The Texas Legislature has not adopted a statute that regulates payday lenders separately from other small consumer lenders in the state. This means that lenders licensed under Texas’s small loan law who wish to offer payday loans must comply with the state’s traditional small loan interest rate cap of 48% per annum.512 However, Texas law also allows licensed lenders to charge an additional “acquisition” fee of up to ten dollars per loan.513 When combined, the interest and acquisition fee amount to an effective annual percentage rate of about 309%, assuming a $100 loan with an initial term of fourteen days.514 At the end of the loan period, the lender may either renew the loan continuously or convert the loan from a single payment balloon loan to a declining balance installment note.515 Because Texas’s price limits are lower than many states, a significant percentage of payday lenders in Texas have turned to charter-renting relationships with out-of-state banks. Consumer advocates have reported that over one thousand payday outlets in the state are circumventing the 48% interest plus ten dollar fee price limitation.516 In 2002, for example, Check ’N Go alone extended more than $1 million in payday loans to Texas consumers by renting a 512 7 TEX. ADMIN. CODE § 1.605(c) (2005); TEX. FIN. CODE ANN. § 342.252(3)(B) (Vernon Supp. 2004).
513 7 TEX. ADMIN. CODE § 1.605(c) (2005); TEX. FIN. CODE ANN. § 342.252(3)(A) (Vernon Supp. 2004).
514 For example, a consumer borrowing $100 would need to pay a ten dollar acquisition charge in addition to interest, which, at an annual rate of 48%, would be $1.87 if the borrower planned to repay the loan after fourteen days. Consequently, the total fees of $11.87 represent 11.87% interest over the two-week period, which is the equivalent of an annual rate of interest of 309.47%. Loans with larger principles will have smaller annual percentage rates because lenders cannot proportionally increase the ten dollar acquisition charge. Thus, a fourteen-day loan of $300 would have a maximum finance charge of $15.60 and an annual percentage rate of 135.57%. See 7 TEX. ADMIN. CODE § 1.605(c) Exhibit 1 (2005). This creates an incentive to induce borrowers to make multiple loans in smaller increments. Thus, Texas regulators, consumer attorneys, and courts should carefully give careful scrutiny to payday lending arrangements where multiple loans are taken from the same lender.
515 Id. § 1.605(f)(1).
516 CONSUMER FEDERATION OF AMERICA, PAYDAY LENDERS USE FDIC BANKS ANDSHAM REBATES TO PEDDLE EXORBITANTLY PRICED SMALL LOANS (Mar. 31, 2004), http://www.consumerfed.org/033104_2004payday.html.
2005] PREDATORY LENDING AND THE MILITARY 801 charter from Ohio-based First Place Bank.517 Texas is an expansive state, with a very large and very diverse population, including pockets of extreme poverty, numerous large metropolitan areas, and a long border with Mexico. This variety creates several variables that would presumably draw payday lenders away from military bases, leading one not to expect the same high concentrations of payday lending around military bases in the Lone Star State. Nevertheless, payday lenders have many bases to target in Texas, including seven large installations and dozens of smaller facilities scattered around the state. Because the bases are located in a variety of geographic and demographic settings, Texas is an ideal location for close inspection.
However, because Texas has the same licensing rules for payday lenders as it does for other consumer lenders, the state’s Consumer Credit Commissioner does not maintain a separate database of lenders offering payday loans. Rather their registry of consumer lenders includes not only payday lenders, but also pawn shops, tax preparation offices, signature loan companies, and others. The Consumer Credit Commission lists 3239 licensed consumer lenders, all of whom have the legal authority to make payday loans.518 Nevertheless, many of these lenders have different business models and do not engage in payday lending. In an attempt to get a more accurate count of payday lenders in Texas, we again turned to the Reference USA business database, which lists 1664 payday lenders, or about eight payday lenders per 100,000 people, ranking Texas fifteenth of our 20 states surveyed.519 In spite of our initial hypothesis to the contrary, many of the counties with excess payday lenders are those with a military base. The worst county in the state is Wichita County, home to Sheppard Air Force Base and its nearly 10,000 personnel. With 132,000 people, 35 banks, and 22 payday lenders, Wichita county ranks high in all three categories of measurement and has about twelve more payday lenders than statistically expected. Ranking second is Nueces County, home to Corpus Christi and its Naval Air Station. There are over 300,000 people and 77 banks in this county, but it has 45 payday lenders—20 more than our predictions based on population. El Paso County, home to Fort 517 See Letter to James E. Gilleran, Director of the Office of Thrift Supervision (Jan. 3, 2003), http://www.naca.net/OTSletter.doc.
518 STATE OF TEXAS, OFFICE OF CONSUMER CREDIT COMMISSIONER, LICENSED LENDERLIST (Dec. 2003) (on file with authors).
519 Reference USA, Category Heading: Check Cashing Services, available at http://www.referenceusa.com/ (last visited Oct. 17, 2005). See infra note 407, and accompanying text (discussing statistical reliability of Reference USA database). In crosschecking the Reference USA figure, we found 1,570 businesses statewide with the terms such as “Advance,” “Payday,” “Cash,” and “EZ” in the business name in the state’s list of small loan companies. STATE OF TEXAS, OFFICE OF CONSUMER CREDIT COMMISSIONER, LICENSED LENDER LIST (Dec. 2003) (on file with authors).
802 OHIO STATE LAW JOURNAL [Vol. 66:653 Bliss, ranks ninth worst in the state with 70 banks and 61 payday lenders for approximately 680,000 residents. Goodfellow Air Force Base is in Tom Green County; this county ranks tenth worst statewide with 104,000 people, 29 banks, and fourteen payday lenders. In fact, of the ten largest military bases in Texas, only Laughlin and Dyess Air Force Bases are not in or bordering one of the worst sixteen counties in Texas for payday lending. Because there are 245 counties in the state, this is a highly suggestive statistic.
There are 1745 ZIP codes in Texas and dozens of military installations.
Therefore, we must limit our discussion to the largest handful of installations in the state. Almost every base in the state has a ZIP code adjacent to it that has payday lenders in excess of statewide averages. Several of the bases that have closed within the last ten years, such as Carswell Air Force Base, Reese Air Force Base, Bergstrom Air Force Base, and Chase Naval Air Station also have adjacent ZIP codes with large numbers or high densities of payday lenders.
Though Dyess Air Force Base in Abilene and Laughlin Air Force Base in Del Rio do have more payday lenders nearby than we predicted based on local populations, they are the only two bases out of nearly a dozen we examined that do not have unusually large numbers of payday lenders in the neighboring ZIP codes.
Sheppard Air Force Base, perhaps the second largest Air Force Base in the country, has within three miles of its gates two ZIP codes (76301 and 76306) that rank in the top 25 statewide and a third ZIP code (76308) 4.5 miles away that ranks fifty-second out of 1745 ZIP codes. In the two closest ZIP codes, there are only four banks but twelve payday lenders. That is 9.25 payday lenders above statistical expectations for the populations in those ZIP codes.
San Angelo ZIP code 76903 ranks forty-seventh in the state, easily among the worst five percent statewide. This ZIP code borders Goodfellow Air Force Base and has a population of about 32,000. We counted eleven banks in this ZIP code and eight payday lenders, which is 5.5 more payday lenders than expected based on statewide averages.