«OHIO STATE LAW JOURNAL VOLUME 66, NUMBER 4, 2005 Predatory Lending and the Military: The Law and Geography of “Payday” Loans in Military Towns ...»
1. Congress’s Position: The Servicemembers’ Civil Relief Act Historically, Congress has not been blind to the financial vulnerability of military personnel. Ever since the early nineteenth century, Congress has taken steps to protect service members from civil lawsuits brought by creditors.
During both the War of 1812 and the Civil War, Congress passed “stay laws” which suspended civil proceedings against soldiers and sailors until they returned from war.223 When passing similar legislation during World War I,224 a
House Report explained:
[T]here are... tens of thousands of men in military service who will be utterly ruined and their families made destitute if creditors are allowed unrestrictedly to push their claims; and yet these same soldiers, if given time and opportunity can, in most cases, meet their obligations dollar for dollar. The country is asking... its young men to risk their lives and, if need be, to give up their lives for their country. Before long even more will be asked to make the same sacrifice. Is it more than naked justice to give to the savings of these same men such just measure of protection as is possible?225 World War II ignited similar concerns, causing Congress again to protect service members, this time with the Soldiers’ and Sailors’ Civil Relief Act of
1940.226 This law authorized “temporary suspension of legal proceedings and transactions which [could have] prejudice[d] the civil rights of persons” fighting in World War II.227 Unlike previous legislation, the World War II law did not automatically expire at the end of the war. As a result, although Congress shall accrue against any person who, by reason of [war],... cannot be served with process... the time during which such person shall so be beyond the reach of legal process shall not be deemed... as any part of the time limited by law for the commencement of such action.
Act of June 11, 1864, ch. 118, 13 Stat. 123; see U.S. ARMY JUDGE ADVOCATE GENERAL=S SCHOOL, SOLDIERS= AND SAILORS= CIVIL RELIEF ACT GUIDE 1-1 (July 2000), http://www.louisvillelaw.com/federal/ArmyPubs/ja260_sscra_db.pdf [hereinafter JAG GUIDE].
224 The Soldiers’ and Sailors’ Civil Relief Act of 1918, ch. 20, 40 Stat. 440, did not completely ban all civil actions, instead requiring “trial courts to take whatever action equity required when a service member’s rights were involved in a controversy.” JAG GUIDE, supra note 223, at 1-1. Specifically, it protected soldiers from proceedings in bankruptcy, foreclosure, repossession of property, default judgments, stays of proceedings, and evictions.
Jarrett, supra note 223, at 174 (citing H.R. REP. NO. 108-81, at 33 (2003)).
225 Boone v. Lightner, 319 U.S. 561, 565 n.2 (1943) (quoting H.R. REP. NO. 65-181, at 2–3 (1918)).
226 Soldiers’ and Sailors’ Civil Relief Act of 1940, ch. 888, ' 100, 54 Stat. 1178 (1940).
227 Id. at 1179. The Act=s specific protections included the following:
staying civil court proceedings if military service materially affected the service member=s ability to defend his or her interest; reducing interest rates to six percent on pre-service loans and obligations; requiring a court order before a service member’s family could be evicted from a rented residence for non-payment if the monthly rent was $1200 or less; terminating a pre-service residential lease; and allowing service members to retain their state of residence for tax purposes despite military relocations to other states.
Jarrett, supra note 223, at 175.
688 OHIO STATE LAW JOURNAL [Vol. 66:653 amended the Act many times,228 it stayed in effect until December 2003, when Congress completely overhauled it under the new name of the Servicemembers’ Civil Relief Act of 2003 (SCRA).229
Like previous statutes, the purpose of the SCRA is:
to provide for, strengthen, and expedite the national defense...
[and to enable] servicemembers of the United States... to devote their entire energy to the defense needs of the Nation [by providing] for the temporary suspension of judicial and administrative proceedings and transactions that may adversely affect the civil rights of servicemembers during their military service.230 Among other provisions, the SCRA protects against default judgments;231 prohibits creditors from repossessing, selling, foreclosing on, or seizing the property of a service member;232 and protects military families from being evicted.233 Perhaps most significantly, the SCRA also enables service members to reduce interest rates on any previous obligations to a six percent annual rate.234 Nevertheless, the SCRA has virtually no impact on payday lending. Payday lenders generally do not take security interests in personal property, making repossession protections irrelevant. And, although the Act requires a reduction in interest rates to six percent on any debt incurred before going on active duty,235 the legislation imposes no limit on rates of loans consummated after a service member is activated. Consequently, the SCRA’s only threat to the payday loan industry would arise if a service member entered into a payday loan transaction and then, and only then, was called up to active duty. In that case, the SCRA would reduce the annual interest rate on the loan from around 450% 228 E.g., Act of Oct. 6, 1942, ch. 581, 56 Stat. 769; Act of Jan. 20, 1942, ch. 10, 56 Stat.
10; Act of May 13, 1942, ch. 303, 56 Stat. 276; Revenue Act of 1942, ch. 619, 56 Stat. 798;
Soldiers’ and Sailors’ Civil Relief Act Amendments of 1991, Pub. L. No. 102-12, 105 Stat.
34; Veterans Benefits Act of 2002, Pub. L. 107-330, 116 Stat. 2820.
229 50 U.S.C. app. §§ 501-596 (2005).
230 Id. § 502.
231 Id. § 521.
232 Id. §§ 532-533.
233 Id. § 531.
234 Id. § 527. This protection applies only to obligations incurred by the service member prior to entering active duty.
235 50 U.S.C. app. § 527 (2005).
2005] PREDATORY LENDING AND THE MILITARY 689 to 6% “during the period of military service.”236 Currently, federal law provides no interest rate cap whatsoever on loans made to active duty service members.
Some legislators from both parties have acknowledged their discomfort with this fact.237 As of this writing, Congress is considering at least one bill, called the Servicemembers Anti-Predatory Lending Protection Act, which would cap annual percentage rates of payday loans to military members at 36%Ca reduction of about 400 percentage points from current average rates.238 Sponsored by Congressman Sam Graves (R-Mo.), the bill would also prohibit payday lenders from automatically renewing, refinancing, or consolidating a payday loan with the proceeds of another loan without executing a new loan document.239 The bill has struggled under intense behind-the-scenes opposition from payday lenders.240 With Representative Graves’s bill seemingly stalled, and national attention focused on the well-being of service members suffering from conflict in the Middle East, the issue appears likely to remain at the forefront for some time.
236 Id. § 527(a)(1). In order for a service member to take advantage of the provision, he or she need only provide to the lender written notice and a copy of the military orders calling the service member to duty. Id. § 527(b). If the lender were to object, a court could refuse to reduce the interest rate if it determined that the service member=s military service did not Amaterially affect” his or her ability to pay the interest as stated in the original loan contract. Id. § 527(c).
237 See Ken Newton, Bill Targets Payday Loans to Military, ST. JOSEPH NEWS-PRESS (St. Joseph, Mo.), Feb. 10, 2005, at 1B.
238 H.R. 5300, 108th Cong. ' 2 (2004).
240 When Representative Graves first introduced the legislation in 2004, it was referred to the House Committee on Veterans= Affairs, and then to the Subcommittee on Benefits.
Thirteen days later, the bill stalled and sank. Henriques, supra note 12. On January 4, 2005, Representative Graves resubmitted the bill with the same text. As of February 2005, the House Committee on Veterans= Affairs was still reviewing the bill, and it was considering expanding the bill to include non-military borrowers. Newton, supra note 237.
690 OHIO STATE LAW JOURNAL [Vol. 66:653
2. The Debate: Do Payday Lenders Target Military Service Members?
Given the resurgence of payday lending in the past decade, the factors placing military personnel at risk for debt problems, and the absence of direct federal regulatory control under the SCRA, it was perhaps inevitable that questions over payday lending to service members would develop. Recently, military leaders and rank-and-file enlisted personnel have complained about the harsh consequences of payday loans for service members. A front page New York Times article told the story of a young Navy Petty Officer and his wife who borrowed $500 from a Puget Sound payday lender. The sailor’s wages could not keep up with the interest forcing him to borrow again and again until he had borrowed over $4000Cabout 25% of his annual incomeCin instant loans from lenders with official names like “Military Financial Network.”241 Based on industry records, the article informally estimated that 26% of all military households have borrowed from payday lenders.242 Network television news bureaus have given airtime to military complaints.243 Faculty from the Judge Advocate General’s School have bemoaned the consequences of payday loans for enlisted personnel, arguing that “[r]arely does the service member emerge from [a payday loan]... in better financial condition and often only gets deeper in debt.”244 Rear Admiral David Architzel has complained that payday loans “seem [like] an appealing solution” for the tight budget problems of enlisted military personnel, but actually “compound their financial problems by subjecting them to the additional hardships of what are effectively unreasonable interest rates.”245 A director of a state Navy Marine Corps Relief Society, which attempts to assist service members in financial trouble, explained that the payday lending problems for service members are “getting worse, really— much, much worse.”246 A chorus of military personnel and journalists have complained that payday lenders are now flocking to the highways and strip malls near the gates of military bases to feed off the wages of enlisted personnel.247 241 Henriques, supra note 12; U.S. ARMY, supra note 180.
242 Henriques, supra note 12. Previous research by Gregory Elliehausen suggests that approximately 180,000 military households used payday loans in 2002. The New York Times compared this figure to Pentagon personnel figures to come up with the 26% estimate. Id.
243 CBSNews.com, supra note 10.
244 The High Cost of Borrowing, supra note 15 245 Shean, supra note 14.
246 Henriques, supra note 12.