Payday Lending & the Military: Part 2
Just when you thought Congress had dealt with this issue, it just keeps comin' back.
A quick recap: After a push by the Pentagon and consumer groups, Congress passed legislation capping the annual interest rate lenders could charge members of the military at 36 percent. The reason: An increasing number of service members were losing their security clearances because they had fallen into debt, in part because of reliance on payday lenders and online lenders that target members of the military, charging them fees and interest rates on loans that, when added up, reach APRs well into the triple digits.
Payday lenders tried to argue they are simply offering credit to folks who otherwise couldn't get it and the fees and interest they charge reflect the risk they assume as well as their costs. Their argument, suffice it to say, didn't prevail though, at least not when it comes to service members.
Since the law passed, two major banking trade groups, the American Bankers Association and Independent Community Bankers of America, have gone to the Pentagon to ask to be exempted from it, saying it would hamper them from offering alternatives to payday loans. Comments by industry were due today. (Feb. 5)
Let's take a look at some of the banks' arguments:
* The 36 percent interest rate cap would limit the size of a late fee charged on a small credit card balance.
* Fees charged for bounce protection programs and for overdrafts could also breach the cap.
* It's hard to identify members of the military, not to mention their dependents.
* The new law is unnecessary.
What I find curious about the banks' stance is that they are trying to have it both ways. They are saying their products should not be lumped in with payday loans, yet at the same time, they want to be able to keep charging what in many states counts as usurious interest rates! (Federally insured and state chartered banks are already exempt from state interest rate caps. That's why Citibank can still charge me 29 percent interest on my credit card even though interest rates are capped at 6 percent in D.C.)
Upon closer examination, the so-called payday alternatives some banks offer aren't much in the way of alternatives at all.
* First Bank of Delaware offers installment loans through the Internet provider PurposeLoans.com aimed at the "frequent customer of cash advance" that can carry an APR of 350 percent for a $300 loan.
* Wells Fargo Bank and U.S. Bank offer a "direct deposit account advance" with high up-front fees, repayable on payday with an advertised APR of 120 percent.
Supporters of the law concede there could be alternative loan products that might run afoul of the 36 percent interest rate cap, but they argue that regulators can easily write individual exceptions for those products and that a carve-out for an entire set of institutions is not necessary. The point of the law, after all, is to protect military borrowers, not existing credit practices.
Worth noting is the stance taken by the National Association of Federal Credit Unions, which include those associated with the various wings of the military such as the Naval Federal Credit Union, which are often on the front line when it comes to providing payday loan alternatives to service members.
"We did not seek out a carve-out during the legislative process and are not today seeking one," said NAFCU president Fred Becker.
Now, if it were up to consumers, rather than regulators, I reckon the banks would have a harder time convincing anyone of their "need" to charge late fees that add up to an APR higher than 36 percent. Ditto for bounced check and overdraft fees. But it's not up to consumers. It's up to the Pentagon, which is supposed to draft regulations and implement the law starting in October. We'll see how it shakes out.
By Annys Shin |
February 5, 2007; 9:00 AM ET
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