Payday Loan Writer
Alan L. Feld is the Maurice Poch Research Professor at the Boston University School of Law. Let's just say he isn't a major supporter of military payday loans.
In a recent article in The Providence Journal, Feld discussed the major drawback of these cash advances: if a sailor is unable to pay off the loan could actually lose his security clearance, based on of financial mismanagement of personal debts. Without clearance, the sailor cannot be deployed overseas. It's not difficult to see how severe this can become.
For many reasons, military personnel are high profile targets for providers of faxless payday loans such as these; they're often financially unsophisticated and far from family and friends. With full disclosure of the interest rates and compliance with Rhode Island's licensing requirements, a payday loan service can operate within the law here.
So, how can military payday loan problems be fixed? In one approach to the situation, Congress could prohibit high interest rates and set a limit on how much instant payday loan services may charge. A Senate amendment recently added to the Defense Authorization Bill of 2007 would cap the interest rate for loans to armed services members and their dependents at 36 percent; the interest-rate limit must still pass the House before going to President Bush for his signature.
The amendment's sponsors hope that the legislation will help limit the financial exploitation of military personnel. This is a welcome first step that creates criminal penalties for charging military personnel overly high interest rates, which should discourage the practice.
However, a limit on payday advance loan interest charges can't solve the problem by itself. A more coordinated approach to the problem should add competition and education to regulation. Consider the possible effects of the interest rate cap:
- The payday loan lenders might continue to make the loans at the lower interest rate, but this seems improbable. More likely, in the absence of the high profitability that attracted the lenders, they would withdraw from the military personnel market. Personnel strapped for cash could then find themselves in financial difficulties with no ready source of money.
Alternatively, lenders could find ways to evade the interest cap or avoid its enforcement, perhaps through Internet lending. In short, regulation could reduce or eliminate a service that fills a need, albeit at high cost, for some military personnel, or it could drive the high-interest-rate activity into new forms, thus failing to eliminate it. In either case, regulation alone probably can't address the problem satisfactorily.
Therefore, the government should supplement regulation with the aid of market forces: It should encourage competition with the high-priced payday cash advance lenders by lenders who provide short-term loans to military personnel at reasonable cost. Two sources of short-term funds for military personnel in fact already exist.
Organizations such as the Army Emergency Relief Fund and the Navy-Marine Corps Relief Society provide loans for service people to meet unexpected expenses, such as car repair. Along with competition, the government should encourage education. Payday loan services spend considerable sums on advertising; the potentially competitive lenders do not.
To help eliminate predatory pricing of short-term loans, officers need to support the financial education of those under their command. From base commanders on down, they should inform their military personnel of the risk of financial trouble created by high-interest-rate loans, and provide opportunities for them to learn of the less costly alternatives.
The Department of Defense has taken some steps in this direction, but it needs to do more to publicize the lower-cost alternatives. Through regulation, competition and education, the government can help members of the armed services deal with their short-term financial difficulties at a more reasonable cost. And wave goodbye to the military payday loan world forever!