Sharks are circling while our troops drown

An effort to cap interest rates on payday loans to military personnel was in peril Wednesday as House and Senate negotiators worked on defense bill amendments.

Although the U.S. Department of Defense strongly supports a limit of 36 percent included in the Senate version of the bill, House conferees were apparently leaning toward weaker provisions that include no cap.

Too bad, because without some controls, financial pressures caused in part by burdensome payday loans will continue to harm members of the military and their families at a time when overseas deployments already have them stressed out. Many are young and unschooled in the use of credit. Helping them out is not just a question of fairness, as a U.S. Department of Defense report concluded in August.

“Predatory lending undermines military readiness, harms the morale of troops and their families, and adds the cost of fielding an all-volunteer fighting force,” says the report, which includes several grim case studies. One describes the snowballing of a $500 payday loan into a total obligation of $15,000.

That’s an extreme example. But it is by no means unusual for that $500 loan, rolled over repeatedly, to rapidly generate interest costs far in excess of the loan amount. A chart of on-line sites that target servicemen and -women shows charges that can take the effective annual interest rate to more than 700 percent.

The department estimates 17 percent of armed forces personnel turn to payday lenders, many multiple times.

At some bases, personnel must run a gantlet of lenders just to reach the gates. A map of the Tacoma area shows dozens of payday loan offices encircling McChord Air Force Base and Fort Lewis. Lender density is four times that found in other parts of Washington.

Despite efforts to control some of the industry’s worst practices, payday lending continues to thrive in the state. Office locations, loans, and loan totals have increased steadily since 1997. In 2005, the industry made 3.4 million loans for $1.3 billion in Washington.

If a lender charges the maximum fee allowed by the state, the rate on a two-week, $500 loan equates to 391 percent.

Fairchild Air Force Base has kept its payday problem under control by offering educational programs and some emergency loan resources. Courses in budgeting and other basic financial skills are mandatory, and the classes include warnings about the pitfalls not just of payday lending, but of car title loans and other unconventional, high-interest loans.

Financial preparedness is the best way to avoid such products, says community readiness consultant LeRoy Olson “The reason people are using them, they don’t prepare.”

He estimates 300 base personnel a year take financial education courses.

Outside the base, Global Federal Credit Union for three years positioned its own payday loan office in Airway Heights in an effort to offer Fairchild personnel an alternative to predatory lenders. In return for opening an account and direct deposit of paychecks, Global made loans of up to $700 for just a $5 fee up front. The credit union closed the office in March because it was not self-sustaining but, in helping airmen find alternative resources, Global found many qualified for personal lines of credit or credit cards with no-fee cash advances.

“We continue to try and reach out,” says Senior Vice President Mary Sharkey.

The military did not just recently tumble to the problem of payday lending. In fact, the Defense Department report found that stepped-up education efforts have slightly reduced the number of soldiers, airmen and others who are turning to payday lenders.

The industry has responded to the report by challenging some of its numbers, and its conclusions. A 36 percent rate cap would not generate enough revenue to cover operating costs and, with payday loans unavailable, servicemen and — women will be forced into the jaws of the loan sharks.

The department says restricting access to high-interest loans will force more military families to rely on counseling and other alternatives to resolve their financial problems. That would be great.

More likely, if indeed a cap is imposed, the industry will find a way to adapt.