Consumer Law In the News

Military Families - 1; Payday Lenders - Big Fat ZERO

As the 2nd “Losers” bullet in this article from Stars and Stripes makes clear, payday lenders are in mourning over the loss of one of their chief sources of profit: military families. (Stars and Stripes gets the premier link, since it’s something the Armed Services have long worked and lobbied for, but see the bottom of the post for news and commentary links from other sources.) In the 2007 Defense Authorization bill, there is a much-heralded provision - Section 987, which you can read here in PDF from NACA - lenders are limited to imposing an annual percentage rate (APR) not to exceed 36%.

Why is this so devastating for payday lenders? When you consider that most payday loans carry APR terms that can exceed 500%, it becomes quite clear. How do they get away with it? It’s a story for another post, but essentially they pull a fast one on financially distressed workers. Here’s how it works: You’re in need of cash to pay some bills. You reason that a payday loan can’t be that bad - it’s just a matter of timing for you, right? You need the money now, but don’t get paid until next Friday. So you log on to one of the countless payday loan websites, fill out a short application, fax in your signature and wait. The lender (who could be in the Cayman Islands, Puerto Rico … anywhere, really, except in your state which prohibits usurious rates like the ones this lender imposes) makes a few desultory calls to verify your employment and the fact that you do indeed exist, and then the next thing you know, you’ve got $1000 in your bank account! And all you have to do is … nothing, because the money will be automatically deducted from your bank account on your next payday. Well, plus a $150 interest payment. But that’s OK, right? It’s only 15%. That’s under half the limit set by Congress for military families in this new law, right?

Wrong. That’s not the annual percentage rate. That’s just the rate imposed if you pay the loan back in one week. The APR - the cost to carry the loan the entire year - runs much higher. In our example, the APR would be a whopping 391%.

There’s so much more to say about these horrible predatory lending practices, but the lesson for today is that finally, at long last, it looks like the days of the payday lender’s free ride might finally be coming to an end. Poor things.

It could have been stronger, but at least it’s a start, and the biggest news is that Congress is finally starting to wake up and smell the oppression being visited on their constituents in the name of free market capitalism. Yes, lower and middle class families are being squeezed dangerously tight by financial obligations, rising costs of medical care and gas, and the ever-decreasing coverage of insurance policies and they need relief, badly. But payday loans? Not the answer.

Other News & Commentary Links:
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• Colorado Springs Business Journal
• Financial News & Daily Record
• San Diego Daily Transcript
• Arizona Daily Star

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