Senators consider payday loan limits, criticize industry
September 16, 2006
WASHINGTON — Supporters of the payday lending industry petitioned members of the Senate on Thursday to block proposed limits on short-term loans to troops, saying the Defense Department is overreacting to the problems of a small number of servicemembers.
Similar proposals to curb the military’s use of payday loans — short-term payouts with high interest rates — have been discussed in Congress for years. Over the last few months, the proposals have gained traction, increasing the focus on the industry and its critics.
In June, the Senate included an amendment in the 2007 defense budget bill that would cap loans to servicemembers at a 36 percent annual interest rate and prevent multiple automatic loan rollovers. Last month, the Defense Department authored a report supporting those limits and blasting the industry for preying on young troops.
On Thursday, industry representatives testified before the Senate Banking, Housing and Urban Affairs about the report, saying it lacks any real data showing that servicemembers are at risk.
“We think potentially far-reaching decisions regarding the availability of consumer credit should only be made after an even-handed analysis of such data,” said Hilary Miller, president of the Payday Loan Bar Association. “But this report presents only the point of view of [industry] opponents.”
Miller said no evidence exists to show that payday lenders are targeting military customers, misleading troops with their sales pitches or creating a real financial problem for members of the services.
But critics and several senators on the committee disagreed, calling the practices dishonest and in some cases predatory.
Sen. Mel Martinez, R-Fla., chastised Miller after he said the defense report exaggerates the number of servicemembers using the loans, with industry data suggesting fewer than 5 percent of troops have borrowed money.
“I’m not impressed that you’re only destroying the financial lives of a small percentage of our servicemen,” Martinez said. “You think an 18-year-old taking a 390 percent loan is acceptable?”
Industry representatives have said the 36 percent cap is unfair because their loans aren’t designed to be projected out over one year. A $15 fee on a two-week $100 loan works out to nearly 400 percent annual interest.
But critics of the industry insist the payday lending business model is dependent on loan “flipping” — rolling one short-term loan into the next and compounding the interest. The legislative proposal would also limit the number of consecutive loans troops could accept, to limit the debt they accumulate.
Miller said the proposed loan limits would effectively bar his members from lending to troops, but most of the committee members present Thursday expressed support for the limits.
The lone exception was Sen. Tim Johnson, D-S.D., who said he was concerned that the industry fills a legitimate need for quick cash.
“If we are to eliminate payday lending altogether, then who fills in that niche?” he asked his colleagues. “Because the need remains. It would go to pawn shops, loan sharks. … Don’t jump from frying pan into the fire.”