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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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543 By its own terms, the Fair Debt Collection Practices Act is not applicable to at least some payday lenders because it governs only professional third-party debt collection agencies, rather than originating lenders. 15 U.S.C. §§ 1692a(4), (6); 1692d (2004) (unlike “debt collectors,” “creditors” are not barred from harassment or abuse under the federal statute).

2005] PREDATORY LENDING AND THE MILITARY 827 make payday loans as required by state law.544 Moreover, dozens of lawsuits and enforcement proceedings are regularly brought by state attorneys general, financial institution regulators, and private consumer attorneys.545 Literally thousands of payday lenders around the country openly and systematically ignore state consumer protection laws.546 Despite trade association aspirational goals, no industry with which we are familiar, with the possible exception of the illegal narcotics business, so openly ignores the law. We do not see how reasonable observers of the payday lending industry can have faith in voluntary compliance standards. Either industry best practices will remain so substantively weak as to be irrelevant, or a large portion of lenders will not voluntarily comply. The financial incentives in lending at high rates to distressed and often uneducated borrowers appear to be too great to facilitate responsible lending in the absence of strict oversight. Finally, trade association voluntary guidelines will never recognize the possibility that communities in general, and military communities in particular, may simply be better off without easy access to triple-digit interest rate loans.

2. State Law

Payday lending law in the 20 states we studied can be divided into roughly six categories. The first and largest group includes thirteen states: Alabama, Arizona, California, Colorado, Idaho, Kentucky, Louisiana, Missouri, Ohio, South Carolina, Tennessee, Virginia, and Washington. These states have all clung to only a pretense of price control by adopting fee limitations equivalent to between 390% and 1950% per annum. Many of these states have ancillary rules, such as dollar amount limitations, roll-over limitations, and disclosure rules. Most of these provisions are either redundant with federal law, meaningless, or largely unenforceable. More likely than not, these ancillary provisions were mere bargaining chips used by payday lending industry lobbyists to create an illusion of consumer protection where there is little or none. Certainly there are laws among these states, Missouri’s legislation for example, which stand out as less consumer—and service member—friendly than others. And, there are some states, such as Colorado, that have put more administrative backbone into enforcing their laws. Yet, none of the consumer protection statutes in these states have led to any identifiable reduction in the numbers of lenders clamoring to leech the income of military personnel.

Second, Florida and Oklahoma probably deserve separate mention from the first group of states if only because they have adopted laws requiring lenders to

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use statewide internet-based databases to verify that borrowers do not have outstanding payday loans to other companies. Still, it is far from clear whether payday lenders will actually comply with the database requirements. For example, our data collection efforts suggest that many payday lenders in both states have not bothered to obtain state payday lending licenses.547 Certainly these lenders cannot be trusted to list each individual loan on the state’s database system. Accordingly, the effectiveness of these database systems remains, at least to some degree, an open question.

The third group of states includes Delaware and South Dakota, which have abandoned consumer protections in order to attract financial service industry jobs to their small, primarily rural states. Similar to the first and second group of states, Delaware and South Dakota have no laws which might exert a restraining force on payday lenders seeking to target military personnel. And what may be more significant, with no price controls whatsoever, these two states have become the home of choice for banks that assist payday loan companies in circumventing consumer protection laws in other states. Delaware and South Dakota have legally specialized in undermining the consumer and service member protection efforts of their neighbors.

Texas, North Carolina, and New York all have unique regulatory environments which are materially different from every other state we studied.

While Texas has not adopted legislation specifically addressing payday lending, its price controls are loose enough that payday lenders can still do business within the bounds of Texas law by lending at rates in the neighborhood of 309% per annum. Instead, soldiers in Texas, perhaps more than any other state, have suffered at the hands of the “charter-renting” legal strategy. With the cooperation of banks in Delaware, South Dakota, and other more loosely regulated states, thousands of payday lenders in Texas simply ignore the will and commands of the Texas legislature.

From 1997 to 2001, North Carolina was firmly within our first classification of states. But when the legislature allowed its payday loan licensing law to expire, the state became one of only two states we studied which retained the traditional small loan laws prevalent in the United States for most of the twentieth century. Our empirical results in North Carolina show how difficult it can be for legislatures and regulators who wish to turn back the clock. Once a payday lending industry is established, it is difficult to control. Payday lending in North Carolina continues today under a variety of questionable guises. There, the legislature made a deliberate choice to protect soldiers at Fort Brag, Marines at Camp LeJeune, and others. It remains to be seen if the courts, regulators, and future legislators will have the will power to stand by their decision.

In the empirical analysis, the State of New York stands alone. Of every major military base we studied, Fort Drum in upstate New York is the one 547 See infra notes 289, 406, and 484 and accompanying text.

2005] PREDATORY LENDING AND THE MILITARY 829 location where service members and their families are not targeted for tripledigit interest rate loans. Ironically, the law in New York is not materially different from the law in North Carolina. Herein lies the most important legal insight of our study: state governments retain the power to prevent payday lending within their borders, both to military service members and to all consumers. In state after state, legislators have been sold on the notion that regulating payday lenders with a licensing statute is better than traditional interest rate caps since federal banking regulation makes payday lending inevitable anyway.548 When out-of-state banks have rented their charters to payday loan companies hoping to cash in on the large and potentially lucrative New York market, the state has successfully sued the banks accusing them of criminally facilitating violation of the state criminal usury law.549 Similarly, when payday lenders have tried to disguise their loans in thin veneers such as “catalog sales,” the state has aggressively pursued management of these companies obtaining judgments that hold owners personally liable.550 New York’s stubborn enforcement of its 25% criminal usury cap has acted as a serious deterrent to banks and payday loan companies who consider flouting the will of the New York legislature. This is not to say the Ft. Drum area is free from other potential financial hazards. Credit card lenders, finance companies, car dealerships, rent-to-own furnishers, and pawnshops—as well as banks, thrifts, credit unions—all profitably provide copious amounts of credit to soldiers near Ft. Drum. Yet all of these businesses profit with less brazen rates and collection practices than payday lenders. Accordingly, the New York approach should serve as a model for North Carolina, Texas, and any other state wishing to more carefully protect the welfare of its soldiers and citizens than does Delaware or South Dakota.

3. Federal Law

It is a bizarre twist of fate that gave an agency with the primary mission of protecting banks the primary responsibility for protecting consumers from overreaching banks. Payday loans are a highly controversial financial product with terms nearly indistinguishable from those offered by our nation’s first loan sharks, the nineteenth century salary lenders. Average payday loans carry 548 See, e.g., Shean, supra note 14 (“Del. Harvey B. Morgan, patron of the bill said he and several other House members were uncomfortable with payday-loan practices. However, they decided that ‘payday lending is here’ and that some form of state regulation was needed.... ”).

549 People v. County Bank of Rehoboth Beach, 1:03-CV-1320 (N.D.N.Y. May 25, 2004), www.abanet.org/buslaw/committees/CL230044pub/links.shtml (subscription required).

550 People v. JAG NY, 794 N.Y.S.2d 488, 489 (N.Y. Sup. Ct. May 5, 2005).

830 OHIO STATE LAW JOURNAL [Vol. 66:653 interest rates nearly twice as high as average rates of extortionate New York mafia syndicates.551 Appreciating the profound reputational risk associated with this type of loan, the OCC has concluded that payday lending partnerships unacceptably endanger the safety and soundness of national banks. Unlike the OCC, the FDIC has taken a narrow view of safety and soundness. Our empirical results should serve as a wake-up call to the FDIC as to how serious a reputational threat payday loans are for state banks. For over a thousand years, citizens have surprised lenders and governments with fury over loans to soldiers at loan shark prices. Not only the FDIC, but the vast majority of more responsible banks who eschew payday lending should carefully consider whether the public will find an abuse of trust in triple-digit interest rate loans to eighteen-year-old soldiers and their families.

Independent of safety and soundness concerns, the FDIC’s actions have also hobbled state consumer and service member protection law across the country— all for the benefit of twelve small banks. By creating a plausible veneer of legality on bank-payday company relationships, the FDIC has confused and frustrated enforcement of state regulations. But perhaps even more importantly, the FDIC’s indifferent response to charter-renting places state legislators who wish to protect soldiers from predatory payday lenders in an untenable position.

State legislators have been led to believe that payday lending is inevitable because the FDIC tolerates charter-renting by out of state banks. Many state legislators believe they can only protect consumers from in-state lenders because out-of-state lenders are beyond their reach. While New York’s experience shows that this is not necessarily true, there should be no doubt that many state legislators around the country would prefer double-digit interest rate caps if they applied to all businesses equally. However, these state legislators cannot risk being accused of “discriminating” against local businesses in favor of large out-of-state interests. It is one thing for the FDIC to be ambivalent about protecting consumers, but it is something entirely different for the FDIC to force that ambivalence on other institutions whose mission is protecting their local constituents’ well-being. Indeed, a significant amount of the impoverishment suffered by our nation’s soldiers, sailors, Marines, and airmen at the hands of payday lenders is rightfully laid on the doorstep of the FDIC.

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Just as military leaders must care for the physical and mental health of their people, so too must they take responsibility for service members’ financial 551 Compare FOX AND MIERZWINSKI, supra note 29 (national study showing average payday lender interest rates of 474% per annum) with Comment, Syndicate Loan-Shark Activities and New York’s Usury Statute, 66 COLUM. L. REV. 167, 167 (1966) (reporting extortionate mafia loanshark interest rates averaging 250% per annum).

2005] PREDATORY LENDING AND THE MILITARY 831 health. For too long, civilian government has stood by while a parade of cheats and charlatans have preyed on young service members and their families. With the increasing strain on military resources due to overseas engagements, the military should not expect to use its own funds to bail out enlisted personnel from financial traps, nor can the military expect that financial education and counseling will solve their problems. The expense of designing programs that will make a significant dent in current payday lending trends will be far beyond military capabilities. The Armed Forces cannot take the place of the nation’s public school system. Commanding officer “off limits” orders are also unlikely to be a viable long term solution. These orders are difficult to enforce and monitor: payday lenders will in most cases be free to ignore them, and the orders only last as long as a given commanding officer remains stationed at any one location. Moreover, these orders have a side effect of increasing blame and pressure on those service members who disobey them when seeking quick solutions to their financial problems. These orders also do not bind military spouses, making them a partial solution at best.

Instead, military leaders should actively engage state and federal regulators, state legislatures, and Congress to lobby for better consumer protection laws. In particular, our data suggest that the Pentagon should advocate for a noexception, criminal usury law with robust government enforcement and private litigation rights at both the federal and state level. The United States rose to power during the twentieth century with criminal usury laws limiting interest rates to a moderate range of around 18 to 42%. It was not until we abandoned these laws that payday lenders came to cluster around military bases in the current numbers and with such onerous contractual terms. Moreover, just such a law, as currently found in New York, has been the only legal strategy in the 20 states we surveyed which successfully protected service members from tripledigit interest rate loans. In furthering this goal, the Pentagon should designate an office with responsibility for tracking state and federal predatory lending legislation, assisting consumer advocacy organizations, and coordinating with state and federal consumer protection agencies. Above all, individual military leaders should not underestimate their influence and political capabilities.

Military leaders possess a unique and persuasive voice in advocating for consumer protection of their enlisted personnel. Indeed, the military may be the one institution with the esteem and independence capable of trumping the millions of dollars predatory lenders will readily spend influencing legislative and public opinion with respect to their products.552 552 It is worth noting that current U.S. House of Representatives Majority Leader Tom DeLay gave a keynote address and attended a closed-door fundraiser at this year’s annual payday lender trade association convention in Hollywood, Florida. CFSA Convention Schedule, CHEKLIST, Program Guide to the 2005 CFSA Annual Meeting in Hollywood, FL (Mar. 2005).



This Article has conclusively demonstrated that payday lenders target military personnel. By surveying 20 states, 1516 counties, 13,253 ZIP codes, nearly 15,000 payday lenders, and 109 military bases, this research systematically tracked the location patterns of payday lenders in a preponderance of the military communities in the United States. Even when accounting for commercial development patterns and zoning ordinances with bank locations, payday lender location patterns unambiguously show greater concentrations per capita near military populations. Moreover, of the 20 state legal environments studied, only one was home to a prominent military base where troops were not targeted for payday loans: Fort Drum in upstate New York.

For all those who genuinely care for the welfare of American soldiers, sailors, Marines, and airmen, these empirical results should be profoundly troubling. Supporting the troops should not be merely an empty slogan.

Ironically, many of those who claim most vocally to support the troops are the same individuals who adopt laws allowing predatory lenders to target those troops. What use is a Congress that eats “freedom fries” in the Capitol cafeterias but ties the hands of state regulators who hope to protect soldiers from predatory lending?553 For the great majority of the past century, the American government protected service members from high-cost predatory loans with usury laws limiting interest rates to between 18% and 42% per annum. Through federal preemption and state legislative change, these laws have given way to an environment in which service members are literally surrounded by lenders clamoring to charge annual rates averaging around 450%. Military personnel both in ancient history and contemporary America have chronic financial vulnerabilities owing to their demanding and semi-nomadic lifestyles.

Inevitably, many struggling military personnel and their families find the temptation of short term financial quick fixes advertised as “easy,” “no hassles,” “no credit check,” or “quick cash” too difficult to pass up. For the reasonable and caring, supporting the troops should include an emphatic return to the traditional usury laws insisted upon by previous American generations.

553 In March of 2003, with tensions rising over French opposition to American foreign policy, the U.S. House of Representatives changed menus in the House cafeteria to serve “freedom fries” instead of french fries. Sheryl Gay Stolberg, An Order of Fries, Please, But Do Hold the French, N.Y. TIMES, March 11, 2003, at A5.

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