Payday Loans No Credit Check Arizona by qng19738

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                                    Creola Johnson*

ABSTRACT: The typical payday loan carries an interest rate of over 400 percent and requires the borrower to
repay the loan in a single balloon payment in fourteen days or less. In 2006, the United States Congress passed a law
that affords all active-duty military personnel and their dependents protection from payday loans by prohibiting
lenders from doing several practices considered predatory and from charging more than a 36-percent interest rate on
payday loans. Congress decided to protect military families on the grounds that payday loans negatively impact the
soldier's quality of life and military preparedness. Payday loans, however, harm not only the soldier; they impose
economic hardships on civilian borrowers and even impose social costs on Americans who do not use payday loans.
In 2008, then Senator Barack Obama promised to protect all Americans from payday loans but that promise remains
unfulfilled. To persuade President Obama to act, this Article compares military families to civilian families and
demonstrates that military families enjoy a strong social safety net. In contrast, the safety net for average low-to-
moderate-income civilian families is tattered and torn. While it is laudable that Congress acted to protect young
people who join America’s all-volunteer military, the articulated reasons for why payday loans are predatory remain
the same for the civilian population. If military families, who enjoy taxpayer-sponsored economic security, need
protection from payday loans, then unquestionably civilian Americans, who are largely left to fend for themselves,
deserve the same protection. This Article discusses the shortcomings of competing federal bills that attempt to give
civilian Americans protection from payday lending. It recommends that Congress not only cap interest rates at 36
percent but follow South Africa’s National Credit Act by prohibiting ―reckless lending‖ and allowing it to be a
defense in collection actions brought by payday lenders.


         Private Ryan,1 fresh from a tour of duty in Iraq, returned in 2009 to Fort Jackson, South

Carolina. He was happy to return to his wife and two children and his rental home, which is

subsidized by the United States government as part of his compensation for serving his country.

While Private Ryan was in Iraq, his wife was able to make ends meet by obtaining a new job,

thanks in part to the free childcare assistance program provided to active-duty military families.

Fortunately, the Ryan family has avoided financial disaster despite the recent illness of the oldest

son because their son received free treatment as part of the health care provided to all military


         Recently, however, the Ryan family had to purchase another car for Mrs. Ryan to

commute to work every day, and the Ryan family was a little short on money to pay the

 Creola Johnson (, Professor of Law, The Ohio State University, Michael E.
Moritz College of Law. For excellent feedback, I thank Professor Patrick Bauer. For excellent research
assistance, I thank Britney Cochran, Theresa Cunniff, David Dirr, and Gina Dorcelus (all graduation
  This is a fictional character.
insurance bill. They decided to go to the local payday lending store to receive a short-term loan

in the amount of $300. Mrs. Ryan was worried about the loan payments because she had once

regretted a payday loan she obtained before she was married. Private Ryan assured her the loan

payments would be manageable because a new federal law provides strong protection to military

servicemen and their families from predatory lending by limiting the terms and conditions of

several consumer loans, including payday loans.2

        On the other side of town, Shenequa Stewart,3 a single mother of two, struggles to put

food on the table for her children. Shenequa lacks any formal education beyond high school. She

is supporting her children by working as a store cashier by day and a waitress at the local diner

by night. Unfortunately, Shenequa has fallen two months behind on her rent. In addition,

Shenequa has no health care coverage and has a medical bill of $500 from her youngest child’s

recent illness. Shenequa could hardly believe her child’s treatment for a minor ailment could be

so expensive. She also worries how she will keep her job because she frequently hears rumors

about upcoming layoffs. Shenequa, desperate for cash, obtained a loan from a local payday-

lending store. Unfortunately, instead of obtaining relief from her financial suffering, Shenequa

has almost ensured her financial demise by turning to the payday loan store because she will

never be able to pay off the loan and finance charge (390% APR) in a single balloon payment.4

  Payday loans to active-duty military members and dependents must carry APRs at 36% or below (see
infra notes 5-6), but many payday lenders do not lend to these military families because they claim they
cannot maintain a profitable business with this interest rate cap. See, e.g., Lee Davidson, Payday Tells
Military “No”, DESERET NEWS, Oct. 2, 2007, at A1 (stating that according to the Utah Consumer
Lending Association, ―Utah payday lenders simply cannot make a profit if they charge only 36 percent --
so they will decline to do business with members of the military‖).
  This is a fictional character.
  In South Carolina, payday lenders can charge a finance charge of 15%. See S.C. CODE ANN. § 34-39-
180(E). This translates into an APR of 391%. See South Carolina State Information, Consumer
Federation of America, (last visited Feb. 4, 2010).
As a private citizen, Shenequa has very little financial protection from the predatory practices of

payday lenders.

        As the fictional narrative above illustrates, unlike the average American civilian, the

active-duty soldier has job security and he and his dependent family members enjoy numerous

benefits, including subsidized-housing and health-care coverage free of co-pays and deductibles.

In 2007, United States Congress enacted the John Warner National Defense Authorization Act,

which, among other things, protects not only combat soldiers but all active-duty military

personnel and their dependents from usurious loans by capping interest rates on payday loans at

36% APR.5 In 2008, this new law gained media attention when then-Senator Barack Obama

made a campaign promise to afford all Americans the same protection afforded to military

families.6 President Obama’s promise remains unfulfilled.

        This Article will compare the benefits enjoyed by military families to those enjoyed (or

not enjoyed) by civilian families. Unlike the average civilian worker, the active-duty soldier

enjoys employment benefits that far exceed the private sector. These benefits for soldiers and

their dependent family members include complete health care coverage, educational assistance,

free or subsidized housing, childcare assistance, counseling services, transportation subsidies,

discounted on-base shopping, and family support services. The discussion about the huge

disparity in benefits is not intended to downplay the sacrifices of military personnel. It is not

 See John Warner National Defense Authorization Act for Fiscal Year 2007, Pub. L. No. 109-364, §
670(a), 120 Stat. 2083, 2266 (codified at 10 U.S.C.A. § 987(b) (West Supp. 2007) (capping interest rates
on payday loans, tax refund loans and car title loans at 36%). Because the new law protects all active-
duty soldiers, it protects many military personnel who will never see combat due to their gender
or occupation and who live stateside just like civilians, yet the civilians have no protection.
  See Barack Obama’s Plan To Strengthen The Economy For Working Families, (―In the wake of reports that
some service members were paying 800 percent interest on payday loans, the U.S. Congress took
bipartisan action to limit interest rates charged to service members to 36 percent. Barack Obama believes
that we must extend this protection to all Americans, because predatory lending continues to be a major
problem for low and middle income families alike.‖)
politically correct to say anything negative about active-duty military personnel. However, one

cannot ignore the fact that some of them, just like average civilians, resort to payday lending due

to financial desperation, ignorance or irresponsibility.7 Payday loan borrowers are more likely to

be like Shenequa, a single woman who lacks college education and is the head of her household. 8

Yet Congress chose to protect military families from triple-digit-interest-rate payday loans and

leave average American families with the weakest safety net to fend for themselves.

        Since payday loans came into use nearly twenty years ago,9 there has been a growing

recognition that consumers are snared by payday loans, which carry triple-digit interest rates and

are provided by a $27 billion dollar industry with stores that outnumber McDonald’s

restaurants.10 Part I of this Article describes the predatory characteristics of payday lending that

  The author served in the United States Army Reserve for six years and, during that time, observed a
significant amount of overspending by military personnel even though their basic needs were met.
Nevertheless, the author believes that many of the benefits offered to the troops but not enjoyed by the
civilian population are necessary to encourage young Americans to join an all-volunteer armed forces.
  See Amanda Logan and Christian Weller, Who Borrows From Payday Lenders? An Analysis of
Newly Available Data, CTR. FOR AMERICAN PROGRESS, Mar. 2009, at 5, available at (contradicting the
industry’s favorable portrayal of payday loan borrowers and reporting new data showing 42% of
payday borrowers are single women, 19% lack a high school diploma and 39% have a high
school diploma). The study also found that 38% of payday loan borrowers are non-white. Id. at
   Payday loans came into wide existence in the early 1990’s. See Testimony of Uriah King, Center for
Responsible Lending before the Ohio Senate Finance and Financial Institutions Committee May 7, 2008,
p.2 available at
payday-testimony-05072008.pdf. See Lynn Drysdale & Kathleen E. Keest, The Two-Tiered Consumer
Financial Services Marketplace: The Fringe Banking System and Its Challenge to Current Thinking
About the Socio-Economic Role of Usury Laws in Today's Society, 51 S.C. L. REV. 589, 618 (2000)
(tracing modern-day payday lending back to the late 1800s and early 1900s when ―salary lenders‖ issued
loans to low income workers).
VOLUME 2, 6 (2007), available at
analysis/phantom-demand-final.pdf [hereinafter PHANTOM DEMAND] (stating that ―[s]ince its inception in
the 1990s, the payday lending industry has established over 22,000 locations which originate an estimated
$27 billion in annual loan volume,‖ that ―there are more than two payday lending storefronts for every
Starbucks location,‖ and that ―in 29 of the 35 states with payday lending, payday storefronts outnumber
McDonald’s restaurants‖);Terry Ganey, Lawmaker To Try Again On Payday Loan Reform, COLUM.
support the conclusion that payday loans lead to a cycle of indebtedness and, therefore, payday-

lending should be regulated. Part II underscores the need for federal regulation by describing

some of the ways payday lenders are circumventing laws recently passed by several states to

protect consumers from predatory payday loans. Ohio is presented as a glaring example because

even though Ohio voters supported overwhelming a referendum enforcing a law capping interest

rates on payday loans at 28%, payday lenders are ignoring the new law and continuing business

as usual. National banks—some recipients of taxpayer bailout funds—are now offering payday

loans and, therefore, cannot be counted upon to offer affordable short-term loans to consumers.11

        Part III of this Article discusses competing federal bills aimed at payday lending and

explains why these bills fall woefully short of affording all Americans the same protections

given to military families. One bill would only legalize triple-digit interest rates currently

DAILY TRIB. (Columbia, MO), January 4, 2010, at __ (stating that in Columbia, MO, the number of
payday loan stores are double that of McDonald’s restaurants and that ―[a]ccording to the Missouri
Division of Finance, there were 1,315 payday loan stores operating in the state last year, issuing 2.83
million loans at an average of about $290 with average annual percentage rates of 430 percent‖);
David Rothstein & Jeffrey D. Dillman, Trapped In Debt: The Growth Of Payday Lending In Ohio,
POLICY MATTERS 1, 3 (2007), available at http:// [hereinafter Rothstein & Dillman, Trapped In
Debt] (finding that ―t]here are now more check cash lending shops than McDonalds, Burger King, and
Wendy's restaurants combined in Ohio‖); John D. Hawke, Jr., Comptroller of the Currency, Remarks
Before the ABA National Community and Economic Development Conference (Mar. 18, 2002), (―California alone has more payday loan offices--nearly
2,000--than it does McDonalds and Burger Kings, and other states are not very far behind.‖).
   See H.R.3126, The Payday Loan Reform Act of 2009: Hearing Before the H. Committee on Financial
Services, Subcommittee on Financial Institutions and Consumer Credit,111th Cong. (2009)(statement of
Michael Calhoun, President and Chief Operating Officer, Center For Responsible Lending ). See
generally Jean Ann Fox & Edmund Mierzwinski, Consumer Fed'n of Am. & U.S. Pub. Interest Research
Group, Rent-A-Bank Payday Lending: How Banks Help Payday Lenders Evade State Consumer
Protections, the 2001 Payday Lender Survey and Report (2001), (describing how banks previously partnered with
payday lenders to offer payday loans in violation of state laws).
charged by payday lenders12 while the other bill has gaping loopholes that payday lenders would

simple use to circumvent regulation.13

        Part IV of this Article compares military families, the group with the best safety net, to

average American civilian families, the group with the worse safety net, and concludes that

civilian families deserves just as much protection from payday loans as military families.

        Finally, Part V of this Article proposes enactment of a new law extending to all

Americans the protection from predatory loans now enjoyed by military families. This Article

proposes, that at the very least, Congress should cap small dollar consumer loans at 36% APR.

Congress should follow South Africa’s National Credit Act by prohibiting ―reckless lending‖ and

allow consumers to use reckless lending as a defense in collection actions brought by payday

lenders. The typical payday lender epitomizes reckless lending because the lender does not

perform a traditional credit check, issues loans that frequently exceed the amount of the

borrower’s next paycheck, and require the borrower to repay the loan in a single balloon

payment in fourteen days or less. By prohibiting reckless lending, Congress would provide an

incentive for financial institutions to offer reasonably-priced short term loans.14 Such regulation

would also shift regulatory policy away from branding some consumers as deserving of

   See Payday Loan Reform Act, H.R. 1214, 111th Congress, 1st Session (2009).
   See infra Part III (discussing pending federal legislation, titled ―Protecting Consumers from
Unreasonable Credit Rates Act of 2009,‖ proposed in the 111th Congress by Rep. Speier as H.R. 1608
and Sen. Durbin as S. 500).
   After passage of the Military Lending Act, payday lending to military families decreased and affordable
small-dollar loans increased. See H.R.1214, The Payday Loan Reform Act of 2009: Hearing Before the
H. Committee on Financial Services, Subcommittee on Financial Institutions and Consumer Credit,111th
Cong. (2009) (statement of Jean Ann Fox, Director of Financial Services, Consumer Federation of
America) available at
(reporting that ―affordable loan options to the military increased after the [36% APR] cap [took effect]
and that military debt relief societies were able to reduce assistance given to indebted members of the
military because of the reduction in payday loan usage‖). There is no reason to doubt the same results
would flow from passage of federal legislation protecting all Americans from payday loans.
protection and others as not and put the burden rightfully on financial institutions to engaged in

responsible lending practices.


        Consumer advocates have long recognized that payday loans are a destructive form of

short-term lending.15 Although payday lenders convinced lawmakers in most states that payday

lending was a legitimate short-term financial solution for families low on cash,16 payday loans

are in reality a nightmare for many low-income families. The payday loan industry’s promises to

self-regulate have not rung true.17

        Payday loans, also known as payday advances, deferred deposit loans, and cash advance

loans, are loans given to a consumer in exchange for the consumer’s post-dated personal check

for the amount of the loan plus interest and fees.18 The lender will hold the check until the

consumer’s next payday at which time the consumer is supposed to pay off the entire loan and

reclaim the check.19 The fees and interest associated with payday loans usually amount to APRs

totaling several hundred percent—making payday loans one of the most expensive forms of

credit available.20

   See, e.g., Elizabeth Renuart & Jean Ann Fox, Payday Loans: A High Cost for a Small Loan in Low-
Income and Working Communities, 34 CLEARINGHOUSE REV. 589, 589 (2001).
   See infra notes 37-38 and accompanying text.
   See Creola Johnson, Payday Loans: Shrewd Business or Predatory Lending?, 87 MINN. L. REV. 10,
45–47 (2002) (describing the industry trade association’s ―best practices‖ standards and how its members
have not complied with them).
   Id. at 10.
   Renuart & Fox, supra note 15, at 590 (―The typical annual percentage rate is at least 390 and averages
close to 500 percent, although advocates and credit code enforcement agencies have noted rates of 1,300
percent to 7,300 percent.‖).
        If the consumer does not repay the loan, the lender attempts to cash the check.21 To

prevent the lender from causing the check to bounce, the consumer can pay a fee to rollover—

extend the due date on the loan—or refinance it.22 If the consumer pays the rollover fee, the loan

is usually extended for another two weeks, but the fee does not count towards payment on the

loan.23 In other words, the consumer cannot pay off the loan gradually; the lender will accept

only a single payment of the entire loan.24

        Because of the short maturity date and the inability of the consumer to make partial

payments, research shows payday loans turn into a long-term cycle of indebtedness even though

lenders market them as a short-term loan25 and that most of industry’s revenues are from repeat

borrowers.26 A new study by the Center for Responsible Lending demonstrates 76% of the

industry’s profits are from ―churning‖—any practice where payday lenders circumvent state law

prohibitions on rollovers by closing out the current loan and issuing to the borrower a new loan

immediately or within a few days—and only 2% of the profits are from ―non-churned‖ loans.27

The typical borrower pays back more than double the amount of the original loan.28

   Johnson, supra note 17, at 11.
   Id. at 11.
RATE CAPS ARE ONLY PROVEN PAYDAY LENDING REFORM 7 (2007), available at (―The high price of a payday loan and
the fact that it must be paid off in one lump sum two short weeks later, virtually ensures cash-strapped
borrowers will be unable to meet their basic expenses and pay off their loan with a single paycheck.‖).
WITH $4.2 BILLION IN PREDATORY FEES EVERY YEAR 3-4 (2006), available at [hereinafter FINANCIAL
QUICKSAND] (Based on its analysis of various date from several states, the Center for Responsible
Lending found that that 90% of payday lenders’ revenues come from borrowers who obtain at least five
payday loans a year).
   See PHANTOM DEMAND, supra note 10, at 3, 7-8 (stating that churning cost borrowers $3.5 billion in
fees annually and providing examples of a non-churned borrower as ―[a] borrower [who] takes out a first
payday loan, pays it back, and does not visit a payday lender for the rest of the year‖ and ―[a] borrower
        It is not uncommon for consumers to eventually pay rollover fees far in excess of the

original loan amount and yet learn that the lender insists the loan is still unpaid.29 For example,

Kevin Woodall paid a $150 rollover fee repeatedly for nearly a year on a $350 loan and

ultimately paid $4,000 in fees but still owed $350 at the year’s end 30 Such indebtedness is

apparently by design as one industry lender indicated: ―[T]he theory in the business is you’ve got

to get that customer in, work to turn him into a repetitive customer, long-term customer, because

that’s really where the profitability is.‖31 Borrowers get stuck in a treadmill of debt, which they

can often escape only through filing bankruptcy.32 An academic study found that a single payday

loan of only $300 increases the likelihood of a borrower filing bankruptcy by 2.48 percentage


        Organizations that advocate for and assist consumers ensnared by payday loans see

firsthand the negative impact payday loans have.34 Consider a survey conducted by the Bell

[who]takes out a total of four loans separated by a month or more: one loan in January, another in March,
one in August, and another in December‖).
   See FINANCIAL QUICKSAND, supra note 26, at 2 (stating that ―[t]he typical payday borrower pays back
$793 for a $325 loan‖).
RESEARCH GROUP, RENT-A-BANK PAYDAY LENDING 9 (2001), available at (A North Carolina study found that more than 50% of
borrowers paid interest and fees that exceeded the initial loan amount.).
Leticia Ortega got a $300 loan, payable back with $90 interest in two weeks. Id. at 11. Because she could
not pay it by the original due date, Ortega paid National Money Service a $90 rollover fee every two
weeks for nearly a year, ultimately paying $1,800 and still owing the company the original $300.
Johnson, supra note 17, at 11.
   See KING & PARRISH, supra note 25, at 1 (noting a telling comment made at a 2007 industry conference
by Dan Feehan, CEO of Cash America, a major payday lender).
   Johnson, supra note 17, at 11.
   See Paige Marta Skiba and Jeremy Tobacman, Do Payday Loans Cause Bankruptcy?, available at
   See, e.g., Sandra Guy, Seniors Hurt More by Overdraft Fees, CHI. SUN-TIMES, Oct. 28, 2009, at 24
(stating that according to the Woodstock Institute, a Chicago-area consumer advocacy group, payday
lending stores are clustered near subsidized housing for the elderly and that payday lenders target seniors
because lenders can electronically access the seniors’ bank accounts to get paid from Social Security
Policy Center of Denver where 100% of credit counselors with clients that had used payday

loans stated that the loans harmed their clients financially, and 73% of them responded they

would ―never‖ recommend payday loans to a client.35 Seventy-five percent of credit counselors

indicated that payday loans were ―very harmful‖ in affecting their clients’ ―ability to pay their

mortgage or rent‖ and 75% said the loans were ―very harmful‖ to their clients’ ―ability to meet

other financial obligations.‖36 As more fully discussed in Part IV of this Article, the average

working-class civilian, not just military personnel, deserves protection from this harm.


       Most states have statutes specifically authorizing payday lending.37 A majority of states

have statutes regulating what loan terms are permitted and prohibited.38 The statutes also provide

benefits); Ellen Schultz and Theo Francis, High-Interest Lenders Tap Elderly, Disabled, Wall St. J.
February 12, 2008, at A1.
   Rich Jones and Joe Watt, Credit Counselors Unanimous: Payday Loans Harm Coloradans, THE BELL
POLICY CENTER, Feb. 4, 2009, at 1-2, available at
   Id. at 2.
   Alabama Small Loan Act, ALA. CODE § 5-18-1 to §5-18-24; Alabama Deferred Presentment Services
Act, ALA. CODE §5-18A-1 to §5-18A-22; Alaska Deferred Deposit Advances, ALASKA STAT. §06.50.010
to §06.50.900; Arizona Revised Statute on Deferred Presentment Companies, A.R.S. §6-1251 to §6-1263;
Arkansas Check Cashers Act, A.C.A. § 23-52-101 to §23-52-117; California Deferred Deposit
Transaction Law, CAL. FIN. CODE §23000 to §23106; Colorado Deferred Deposit Loan Act, C.R.S. §5-
3.1-101 to §5-3.1-123; Delaware Closed End Credit Short-Term Consumer Loan Act, DEL. CODE ANN.
TIT. 5 §§ 2227 to 2244 (see in particular Delaware Deferred Installments at Del. Code Ann. Tit. 5 §2232
and Delaware Short-Term Consumer Loans at Del. Code Ann. Tit. 5 §2235A); the District of Columbia
Check Casher Law, D.C. Code §26-301 to §26-323; Florida Deferred Presentment Transactions, F.A.C. §
69V-560.901 to §69V-560.912 (repealed); Georgia Payday Lending Act, O.C.G.A §16-17-1 to §16-17-
10; Hawaii Check Cashing Law, HAW. REV. STAT. §480F.1 to §480F-7; Idaho Payday Loan Law, IDAHO
CODE §28-46-401 to §28-46-413; Illinois Payday Loan Reform Act, 815 I.L.C.S. §122/1-1 to §122/99-99;
Indiana Uniform Consumer Credit Code on Small Loans, Burns Ind. Code Ann §24-4.5-7-101 to §24-4.5-
7-414; Iowa Delayed Deposit Services Act, IOWA CODE §533D.1 to §533D.16; Kansas Payday Loan Act,
K.S.A. §16a-2-404; Kentucky Deferred Deposit Service Business and Check Cashing, K.R.S. §286.9-010
to §286.9-120 and 286.9-990; Louisiana Deferred Presentment and Small Loan Act, La.R.S. §9:3578.1 to
§9:3578.8; Michigan Deferred Presentment Service Transaction Act, M.C.L.S. §487.2121 to §487.2173;
Minnesota Consumer Small Loans, Minn. Stat. §47.60; Mississippi Check Cashers Act, MISS. CODE.
ANN §75-67-501 to §75-67-539; Missouri Lenders of Unsecured Loans under $500 Act, MO. STAT. §
408.500 to §408.510; Montana Deferred Deposit Loan Act, Mont. Code. Ann., §31-1-701 to §31-1-728;
Nebraska Delayed Deposit Service Licensing Act, Neb. Rev. Stat. § 45-901 to § 45-929; Nevada Deferred
Deposit Loans, Short-Term Loans, Title Loans, and Check- Cashing Services, Nev. Rev. Stat. Ann
penalties for non-compliance.39 Many of these states even cap the interest or fees lenders can

charge to consumers.40 Most of these states limit the number of loans that can be made or

renewed41 with the aim of reducing predatory cycles of debt. However, because of the various

churning practices, payday lenders are able to get around these limitations.

        Some states across the country recognized the need for explicit consumer protection by

regulating payday loan terms, including limiting interest rates. However, even when state

§604A.010 to §604A.150;New Hampshire Regulation of Small Loans, Title Loans, and Payday Loans,
R.S.A. § 399-A:1 to §399-A:19; New Jersey Check Cashing, Money Transmitters Act, N.J. Stat.
§17:15A-30 to §17:15C-27; North Carolina Check Cashing Business Statute, N.C. Gen. Stat. §53-275 to
North Dakota Deferred Presentment Service Providers Act, N.D. CENT. CODE §13-08-01 to §13-08-15;
Ohio Short-Term Loan Act, OHIO REV. CODE §1321.35 to §1321.48; Oklahoma Deferred Deposit
Lending Act, 59 OKL. ST. §3103 to §3119; Oregon Title and Payday Loans Act, 54 OR. REV. STAT.
§725.600 to §725.630; Rhode Island Check Cashing Law, R.I. GEN. LAWS § 19-14.4-1 to § 19-14.4-10;
South Carolina Deferred Presentment Services Act, S.C. CODE ANN. § 34-39-110 to § 34-39-260; South
Dakota Law on Licenses for Money Lending, S.D. CODIFIED LAWS §54-4-36 to §54-4-72; Tennessee
Deferred Presentment Services Act, TENN. CODE ANN. §45-17-101 to §45-17-119 (with accompanying
Tennessee Rules Pertaining to the Deferred Presentment Services Act, TENN. COMP. R. & REGS. R. 0180-
28-01); Texas Deferred Presentment Transactions, TEX. FINANCE CODE § 342.601 to §342.658; Utah
Check Cashing and Deferred Deposit Lending Registration Act, UTAH CODE ANN §7-23-101 to §7-23-
110; Vermont Check Cashing and Currency Exchange Act, 8 V.S.A. § 2515 to §2519; Virginia Payday
Loan Act, VA. CODE ANN. § 6.1-444 to § 6.1-471; Washington Check Cashers and Sellers Act, WASH.
REV. CODE § 31.45.010 to § 31.45.210 and § 31.45.900; West Virginia Check Cashing Act, W.VA. CODE
§32A-3-1 to §32A-3-4; Wyoming Post-Dated Check Cashing Act, WYO. STAT § 40-14-362 to §4 0-14-
   See KELLY-LOUW, supra note 30, at 115-20.
   See Alabama, Ala. Code §5-18-19 and §5-18A-12; Alaska, Alaska Stat. §06.50.460; Arizona; A.R.S.
§6-1260; Colorado, C.R.S. §5-3.1-105; District of Columbia, D.C. Code §26-317; Georgia, Georgia Code
Ann. §16-17-2(a)(2)(G); Hawaii, Haw. Rev. Stat. Ann. §480F-3; Illinois, 815 Ill. Comp. Stat. Ann
§122/2-5; Indiana, Burns Ind. Code Ann Illinois, 815 Ill. Comp. Stat. Ann §122/2-524-4.5-7-201;
Kansas, K.S.A §16a-2-404; Kentucky, K.R.S. §286.9-100; Louisiana, La. Stat. §9:3578.4; Michigan,
M.C.L.S. §497.2153; Minnesota, Minn. Stat. §47.60; Mississippi, Miss. Code §75-67-517; Missouri, MO.
STAT. §408.140; Nebraska, NEB. REV. STAT. §45-918; New Hampshire, N.H. REV. STAT. § 399-A:13;
North Dakota, N.D. Cent. Code §13-08-12; Oklahoma, 59 Okl. St. §3108; Oregon, 54 Or. Rev. Stat.
§725.622; Rhode Island, R.I. Stat Ann §19-14.4-4; South Carolina, S.C. Stat Ann. §34-39-180; South
Dakota, S.D. Codified Laws §54-4-71; Virginia, VA. CODE ANN. § 6.1-444- 460; Washington, Wash Rev
Code § 31.45.073; Wyoming, Wyo. Stat § 40-14-363.
   See, e.g., Alaska, Alaska Stat. §06.50.470; Colorado, C.R.S. §5-3.1-108; Illinois, 815 Ill. Comp. Stat.
Ann §122/2-30; Kansas, K.S.A §16a-2-404; Minnesota, Minn. Stat. Ann. §47.60; Missouri, Mo. Stat.
Ann. §408.140; North Dakota, N.D. Cent. Code §13-08-12; South Carolina, S.C. Stat Ann. §34-39-180;
South Dakota, S.D. Codified Laws §54-4-65.
legislators believe they have effectively curbed payday lending by writing airtight statutes,

payday lenders find methods to circumvent the law.42 For example, for several years, payday

lenders, which are non-bank lenders, created ―rent-a-bank‖ arrangements; that is, partnerships

with nationally-chartered banks so they could charge consumers whatever fees they agree to and,

thereby, circumvent state usury laws.43 Once rent-a-bank arrangements became illegal,44 payday

lenders realized they needed to find other ways to skirt state laws that ban or restrict payday

lending. Some lenders have accomplished this by shutting down their physical office locations

in states with severe restrictions and conducting payday lending via the Internet.45 These lenders

then pretend not to know information or avoid asking questions that would disqualify them from

lending to residents of a particular state.46

A. Ohio’s Experience Demonstrates Payday Lenders Will Find a Way to Evade the Law

        While many states are waging this payday lending battle, Ohio is particularly illustrative

of payday lenders thwarting the efforts of lawmakers to protect consumers from predatory

   See, e.g., Warren Bolton, Payday Lenders are at It Again, COLUMBIA STATE (SC), Feb. 3, 2010, at B1
(explaining how payday lenders, in order to avoid complying with amendments to the law expressly
legalizing payday loans, are dropping their license to operate as payday lenders and attempting to operate
under an old law the never envisioned payday lending but would permit triple-digit interest rates).
Koehler 2005). Because of United States Supreme Court precedent holding that banks are exempt from
state usury laws and, therefore, free to charge whatever interest rates customers agree to, payday lenders
saw banking partnerships as a way to circumvent state usury laws. See Marquette National Bank of
Minneapolis v. First of Omaha Service, 439 U.S. 299 (1978).
   The ―rent-a-bank‖ partnerships are no longer legal. See, e.g.,Melissa del Bosque, The Perils of Payday,
TEX. OBSERVER, May 1, 2009, at 14.
   See Jean Ann Fox and Anna Petrini, Internet Payday Lending : How High-Priced Lenders Use the
Internet to Mire Borrowers in Debt and Evade State Consumer Protections, Consumer Federation of
America, November 2004, available at (last visited October 5, 2009).
   See, e.g., Cash America Net of Nevada, LLC v. Pennsylvania, No. 8 M.D.2009, 2009 WL 1974998 at
*7 (Pa. July 10, 2009) (upholding a Pennsylvania law stating a lender using the internet to issue payday
loans to a Pennsylvania resident subjects such a lender to Pennsylvania law).
payday lending.47 As explained below, payday lenders are deliberately evading the law despite

the people of Ohio making it clear that they do not want high-cost payday loans.

        After lobbying the Ohio legislature, the payday loan industry received a holiday present

when, in December 1995, H.B. 313 became effective, thereby legalizing a triple-digit annual

percentage rate (391% APR) on payday loans.48 But in the ensuing years, it became evident that

many Ohio residents were becoming trapped in a cycle of debt as a result of getting payday

loans. Consumer advocates and some lawmakers tried unsuccessfully for years to pass measures

to curb some of the predatory aspects of payday loans.49

        In response to a growing outcry from constituents and consumer advocates, in 2008, the

Ohio legislature passed and first-term Governor Ted Strickland signed into law the Short-Term

Loan Act50 to curb predatory payday lending.51 Specifically, the Act capped the maximum loan

amount at $500, limited the APR on payday loans at 28%, and made the maturity date a

minimum of 30 days.52 Other prohibitions designed to address the payday-loan debt trap include

banning lenders from issuing to a borrower more than four loans per year,53 issuing a loan to a

borrower for the purpose of retiring an outstanding loan between the borrower and lender, and

   See, e.g., Idaho and Other States Wrestle with High Interest Payday Lenders, IDAHO BUS. REV., August
24, 2009.
   OHIO REV. CODE ANN. 1315.35- 1315.44 (repealed Sept. 1, 2008).
See also 15 U.S.C. 1602 (1969), for Truth In Lending Act definitions.
   See, e.g., Bill Would Scale Back Payday Loans, CINCINNATI ENQUIRER, Mar. 20, 2006, A10
(discussing a bill introduced in 2006 by Democratic Sen. Ray Miller that would have capped interest rates
on payday loans but it was never enacted).
   The Short-Term Loan Act is codified under Ohio Revised Code 1321.35–1321.48.
   For a full list of prohibitions, see generally Ohio Rev. Code §1321.41. The Act also requires the
lenders to make mandatory disclosures prior to a consumer entering into the loan. Ohio Rev. Code Ann.
§1321.39 (2009); See also Testimony of Uriah King, Center for Responsible Lending before the Ohio
Senate Finance and Financial Institutions Committee May 7, 2008, p.2 available at
   OHIO REV. CODE ANN. § 1321.39 (West 2009).
   OHIO REV. CODE ANN. § 1321.41(R) (West 2009).
charging a fee to extend the loan’s maturity date.54 For those borrowers who take out two or

more loans in a 90-day period, the Act requires them to obtain mandatory consumer education

before a lender is permitted to make another loan to those borrowers.55 The statute also

addresses a common circumvention technique of out-of-state lenders—issuing loans via the

telephone or Internet—by banning out-of-state lenders from issuing loans to Ohio residents.56

      On its face, the Ohio Short-Term Loan Act arguably regulates all the payday lending

practices that usually lead to a vicious cycle of repetitive borrowing. However, shortly after its

passage, the payday loan industry made it clear that while it was willing to accept the Ohio

legislature’s action as the voice of the people back in 1995, it would not accept the legislature’s

passage of consumer-friendly legislation in 2008.57 The payday loan industry mounted a $20-

million-dollar campaign to defeat the new law through a voter initiative on the November 2008

ballot; however, Ohio voters, by 64 percent to 36 percent, defeated the industry’s initiative.58

      Payday lenders then started skirting the new law even before its effective date. 59

According to a March 2009 study conducted by the Housing Research and Advocacy Center,

   OHIO REV. CODE ANN. § 1321.41(F) (West 2009).
   OHIO REV. CODE ANN. § 1321.41(N) (West 2009).
   The Act states that ―no person not located in Ohio shall make a short-term loan to a borrower in Ohio
from an Office not located in Ohio.‖ Ohio Rev. Code § 1321.36(B). However, it does not prohibit an
Ohio resident from borrowing funds from an out-of-state lender as long as the resident-borrower
physically visits an out-of-state office of the lender.
   Payday lenders are perpetrating similar acts of defiance against a new law in South Carolina. See
Bolton, supra note 42, at B1 (stating that ―[p]ayday lenders were happy to operate under the law adopted
expressly for them as long as there were no consumer protections‖).
   See James Nash and Jim Siegel, 2 Ballot Issues Cost $82 Million: Battle over Issues Was Priciest in
Ohio's History, COLUMBUS DISPATCH (OHIO), Dec. 13, 2008, at A1 (describing how the payday loan
industry spent millions in comparison to the thousands spent by consumer advocates); Thomas Suddes,
Lender Loophole Isn’t Getting Fixed, PLAIN DEALER (CLEV.), Aug. 23, 2009, at G1 (stating that
―legislators’ delay in closing loopholes in Ohio’s anti-payday-loan law‖).
   The exploitation of the loopholes has led to a national bill proposed in Congress. See Protecting
Consumers from Unreasonable Credit Rates Act of 2009, s.500, 111th Cong. § 2 (2009).
only 19 lenders had obtained a license under the new law.60 Most lenders had obtained licenses

under Ohio’s Mortgage Loan Act, which does not require issuance of an actual mortgage and

does not place limits on the interest rates that can be charged, and Ohio’s Small Loan Act, which

allows payday lenders to charge an effective APR of 423% even higher than the 391% allowed

under the repealed payday lending statute.61 Because the Short-Term Loan Act only applies to

businesses licensed under the Act and does not actually mandate that short-term lenders obtain

licenses under it, payday lenders are able to completely skirt the law by obtaining licenses under

the Small Loan Act and Mortgage Loan Act instead.62 The result is that since the inception of

the Short-Term Loan Act over 1,000 payday lenders have obtained licenses under the other two

acts.63 A September 2009 study by Policy Matters Ohio found that every payday lender

surveyed continues to charge triple-digit interest rates and require loans to be paid back within

two weeks or less, and most lenders issue loans in amounts exceeding $500.64 Many are lending

   See Jeffrey Dillman, et al., The New Face of Payday Lending in Ohio, HOUSING RESEARCH &
ADVOCACY CTR., March 2009, at 2, available at
   Id. at 2. What follows is an explanation as to how payday lenders can charge so much interest. The
Small Loan Act provides for an interest cap of twenty-eight percent on loans under $1,000 but unlike the
Short-Term Loan Act, the definition of APR under the Small Loan act does not include any extra fees
charged by the lender. OHIO REV. CODE 1321.13(A) (2008). The statute also caps interest on loans
over $1,000 dollars at twenty-two percent. Only loans under $1,000 are relevant to this analysis. Lenders
that loan under the Small Loan Act may charge origination fees of fifteen dollars on loans under five
hundred dollars and thirty dollars on loans over five hundred dollars. OHIO REV. CODE ANN.
1321.13(I) (West 2009) . The Small Loan Act also allows lenders to charge $15 and $30 dollar
origination fees, respectively, on each refinancing made six months after the original loan. Id.
Additionally, a licensee can contract for default charges for any payment not made within ten days after
its due date. OHIO REV. CODE ANN. 1321.13(K) (West 2009). The Small Loan Act provides no limit on
the length of the loan; therefore, lenders can charge an annual percentage rate of 423 percent on a 14-day,
$100 loan. See Dillman, supra note 60, at 2.
   OHIO REV. CODE ANN. 1321.35-36 (West 2009).
   See Dillman, supra note 60, at 5.
   See David Rothstein, New Law, Same Old Loans: Payday Lenders Sidestep Ohio Law, POLICY
MATTERS OHIO, September 2009, at 1-5 available at (stating that tester called at least
three times and visited multiple times 69 payday loan stores in Ohio and despite these contacts, testers
encountered difficulty obtaining information about loan terms).
over the Internet and charging interest rates higher than, and issuing loan amounts greater than,

the brick-and-mortar stores.65 All these practices are in violation of the new law.

         B. Ohio and Other States Cannot Fix Payday Lending Alone

      Consumer advocates and lawmakers in several states are considering how to close

loopholes in their payday lending statutes.66 Consider again Ohio. The Housing Center has

proposed several changes to existing Ohio law, but even these amendments may not rid Ohio of

predatory payday lenders. The Center asks the legislature to (1) increase the minimum term of

loans under the Small Loan Act (―SLA‖) and Mortgage Loan Act (―MLA‖) to 90 days so as to

allow legitimate loans to be made under those statutes (while requiring payday lenders to use the

Short-Term Loan Act for loans of between 31 and 90 days); (2) prohibit payday lenders from

issuing a loan in the form of a check and then charging a borrower an additional fee to cash that

check; and (3) extend the protection of the Consumer Sales Practices Act to loans made under

the SLA and MLA to provide greater protection to Ohio’s consumers.67 In addition, the Center

recommends that the definition of ―interest‖ include origination fees and other fees charged in

connection with obtaining a loan and loan renewals.68 This expansion of the definition of

interest would prevent payday lenders from misleading consumers by the APRs stated in their

contracts, which do not include some of their fees in the interest calculation. The foregoing

   See, e.g., Closing Lending Loopholes, Editorial, Roanoke Times & World News, May 11, 2009, at A14
(―The pattern should be coming clear to even Virginia’s most stubborn legislators: The General Assembly
passes mild reforms that attempt to rein in the worst abuses of payday lenders; before the ink is dry on the
legislation, payday lenders find loopholes to keep preying on needy customers.‖).
   See Rothstein, supra note 64, at 4-5.
   A proposed definition of interest may include: all charges payable directly or indirectly by a borrower
to a licensee as a condition to a loan, including fees, loan originations charges, services charges, renewal
charges, credit insurance premiums, and any ancillary product sold in connection a with a loan made
pursuant to the Short-Term Loan Act.
recommendations would in theory close all the loopholes.69

        Such proposals are not likely to prevent payday lenders from targeting Ohio residents or

consumers in other states. Across the nation, payday lenders are devising new schemes designed

to disguise payday lending as another product or service in order to avoid regulation. For

instance, because payday lenders are now banned from partnering with banks, payday lenders in

Texas are exploiting a loophole in a broadly-worded statute that allows them to operate as ―credit

service organizations (CSO),‖ which is an entity that is supposed to help improve a customer’s

credit rating. 70 Payday lenders use the CSO status to process loans from third parties and then

collect fees—not interest—thereby evading usury laws.

        In addition to using subterfuge to disguise payday lending, many lenders are doing

business Internet and claiming to not be covered by pro-consumer laws in the state where their

customers are located.71 States are engaged in costly litigation to try to get payday lenders to

comply with their usury laws.72 Moreover, because payday lenders can no longer have rent-a-

   Considering some of the Center’s recommendations, an Ohio state representative introduced legislation
to close the loopholes under the Short Term Loan Act. See Suddes, supra note 58, at G1 (stating that bill
was introduced June 2009 by Rep. Matt Lundy, an Elyria Democrat).
   See, e.g.,del Bosque, supra note 44; Mary Spector, Taming the Beast: Payday Loans, Regulatory
Efforts, and Unintended Consequences, 57 DEPAUL L. REV. 961, 983-95 (2008) (describing how payday
lenders are reorganizing as ―credit service organizations‖ to avoid regulation).
LENDING 5 (2005), available at
(―Internet payday lending is the latest ploy used by small loan companies to evade consumer protections
and usury laws in the state where borrowers apply for and receive loans and few state regulators have
attempted to enforce state credit laws against online lenders.‖); Jeremy LaMarche, Comment, Payday
Lenders Under Attack, Seek Protection in Cyberspace, 19 LOY. CONSUMER L. REV. 218 (2007)
(explaining how payday lenders have moved operations online in response to states’ passing laws
restricting payday lending).
   See, e.g., Cash America Net of Nevada, LLC v. Pennsylvania, No. 8 M.D.2009, 2009 WL 1974998 at
*7 (Pa. Cmwlth. July 10, 2009) (upholding a Pennsylvania law stating a consumer lender using the
internet to engage in business with a Pennsylvania resident subjects such a lender to Pennsylvania law).
bank agreements, some are partnering with Indian tribes to finance their online lending in

circumvention of state consumer protection laws.73

 C. Charging Triple-Digit Interest Rates, Banks are now in the Payday Lending Business

        While state legislators have been wrangling over how to prevent payday lenders from

circumventing state laws, national banks, such as U.S. Bancorp, Wells Fargo, and Fifth Third

Bancorp—all three recipients of taxpayer bailout funds—have been stealthily creating their own

payday loan products,74 cleverly labeled by some as ―direct deposit advances.‖75 For example,

some Firth Third Bank branches have signs posted on their drive-through windows that state: ―I


the teller explains the early access program, she or he is careful not to use the word ―loan‖ and

describes it as a ―service‖ offered to customers with direct deposit, thereby implying that these

customers are especially valued.77 Fees for the service are not mentioned unless the customer

asks and the APR is never mentioned. A comparison of Fifth Third’s loan product to the typical

payday loan demonstrates that many of these bank-provided short-term loans are nothing more

than payday loans.

Loan Process and         Fifth Third’s Early Access Loan78             Typical Payday Loan79

   See, e.g., Marc Lifsher, Internet Payday Lenders With Ties to Indians Dodge California Regulators,
L.A. TIMES, Apr. 13, 2009.
   See Chris Serres, Biggest Banks Stepping in to Payday Arena, STAR TRIB. (Minneapolis-St. Paul), Sept.
6, 2009, at D1.
   See, e.g., Wells Fargo, Direct Deposit Advance® Service Questions, at (last visited Jan. 36, 2010); Nathalie Martin, Payday
Lending Legislation From the Ground Up: A Customers’ View of What Works and What Doesn’t, at 30
(discussing recent empirical study conducted by the author showing some borrowers had obtained payday
loans called ―direct deposit advances‖ from traditional banks such as US Bank and Wells Fargo).
   The author photographed the sign on Jan. 29, 2010. Mid-way on the sign was a clipart of the horn of
   The author has been a Fifth Third customer for nearly 11 years. She regularly goes into a Fifth Third
bank branch for service and is, therefore, describing what she has observed about the Early Access Loan.
   See Fifth Third Bank, Fifth Third Early Access Loan (brochure on file with the author).
   See Johnson, supra note 17, at 11; Bank Payday Loans… They’re Baaaaaaaack, NAT’L CONSUMER
LAW CENTER, June 2009,
Application             None required                                 Short Application
Direct Deposit          Required                                      Not Required
Term of Loan            One day up to 35 days depending on when       Usually 2-week loan but could be
                        the next direct deposit of borrower’s         shorter if borrower’s payday is
                        income check occurs.                          sooner than two weeks.
Fee/Interest Rate       Finance charge $10 for every $100             Finance charge of $15 to $20
                        borrowed. Fifth Third states this is an APR   per $100 for a two-week loan,
                        of 120%.                                      with a resulting APR of 390% to
Repayment Process       Repayment on the loan automatically           Repayment occurs when the
                        occurs when the borrower’s next direct        borrower pays in person by the
                        deposit of at least $100 goes into the        loan’s due date or else the lender
                        checking account, or else the bank will       will deposit the post-dated check
                        withdraw the amount due at the end of 35      in hopes that sufficient funds are
                        days if no direct deposit has come.           in the account to cover the check.

Although Fifth Third claims its fee translates into a 120% APR, experts demonstrate that the

actual APR is 520% for a one- out week loan or 260.71% for a 14-day loan.80 One could hardly

call Fifth Third’s Early Access Loan a reasonable alternative to payday loans, especially given

that the bank will automatically offset the loan against the next direct deposit, and thereby cause

the bank to be paid ahead of all other creditors, including the borrower’s mortgage company.

One could easily see then how a Fifth Third loan could set the borrower on a course of

indebtedness just like any other payday loan.

       National banks began creating payday loans after the Federal Deposit Insurance

Corporation (FDIC) issued its Affordable Small-Dollar Loan Guidelines (―Small Loan

Guidelines‖) for its member banks interested in offering small-dollar, short-term consumer

loans.81 According to the Small Loan Guidelines, banks offering small dollar loans should (1)

charge reasonable interest rates, (2) encourage principal reduction, (3) streamline the [hereinafter Bank
Payday Loans].
   See Bank Payday Loans, supra note 79, at 2; E-mail from Ron Elwood, Staff Attorney, Mid-Minnesota
Legal Assistance, to Creola Johnson 15:56:49 (Jan. 27, 2010) (on file with author).
   Press Release, FDIC, Affordable Small Loan Guidelines (Dec. 4, 2006), available at
underwriting of loans, (4) maximize their automated and technology processes, (5) consider

offering loan repayment programs that have a savings component, (6) collaborate with for-profit

and non-profit institutions in developing small dollar loan programs and financial literacy


       These Small Loan Guidelines appeared to be ignored by many national banks except for

guidelines (3) and (4). For instance, the Small Loan Guidelines recommended a maximum

interest rate of 36% and an installment repayment plan.83 However, many banks like U.S.

Bancorp, Wells Fargo, and Fifth Third are charging triple-digit interest rates and using the direct

deposit feature to have the loans paid in a single installment.84 Therefore, these so-called direct

deposit advance loans are in substance payday loans.

       These bank-provided payday loans can be worse for the consumer than non-bank payday

loans. By requiring direct deposit and using their automated technology to cause payment

immediately when the deposit hits the account, banks are depriving the borrower of using the

funds for necessities such as food and are evading garnishment laws that protect a certain amount

of income for the borrower’s subsistence and that protect Social Security checks and other

benefits.85 The direct deposit requirement was not implemented to benefit the consumer but to

assure the bank of an easy way of facilitating payment of itself ahead of all other creditors via its

technology and automated processes. In contrast, non-bank payday lenders will have to continue

their practices of using manpower to harass their borrowers into repaying the loans or to

encourage borrowers to rollover the loans.

   See supra notes 74-80 and accompanying text.
   See Bank Payday Loans, supra note 79, at 2
        Ironically, payday lenders, who have a track record of circumventing state laws, are

complaining that banks like Fifth Third are ignoring interest rate caps imposed under state

payday lending statutes.86 However, these national banks can ignore state law because federal

banking laws protect them from state laws capping interest rates.87

        The foregoing discussion demonstrates a market failure that has to be addressed by

regulation covering both banks and non-banks. By issuing a suggested guideline of a maximum

interest rate of 36%, the FDIC implies banks are capable of making profitable loans at this rate

(or below) to risky borrowers. Yet many banks, having jumped into the payday lending

business, are engaged in the proverbial race to the bottom in the never-ending pursuit of

additional profits. Americans who are the least sophisticated and the least likely to have

alternatives to payday loans are still in need of reasonably-priced loans.


        The United States Congress has acted to protect only active duty soldiers and their

families from short-term predatory loans, including payday loans. But as discussed more fully

below, Congress is having a difficult time passing legislation that would extend protection from

predatory loans to all consumers. Pending competing bills will not be effective at protecting

Americans from payday loans.

A. Congress Passed Legislation to Protect Military Families from Payday Loans

        Section 670 of the John Warner National Defense Authorization Act (NDAA),88 and

subsequent regulations issued by the Department of Defense (DOD),89 collectively and

   See id. (stating that payday lenders are contending that Fifth Third is ―ignoring Ohio’s 28 % payday
loan cap‖).
   See Johnson, supra note 17, at 107-08.
   John Warner Defense Authorization Act for Fiscal Year 2007, Pub. L. No. 109-364, § 670, 120 Stat.
2083, 2266 (2006), codified as the Limitations on Terms of Consumer Credit Extended to Service
Members and Dependents, 10 U.S.C. § 987 (2006).
commonly known as the Military Lending Act,90 regulates certain consumer credit extensions to

active-duty military personnel and their families.91 Under the Military Lending Act, Congress

capped the APR at 36% for payday loans, vehicle title loans, and tax refund loans to active duty

military personnel and their dependent family members.92 It contains a definition of APR that is

broader than the Truth in Lending Act so that lenders cannot mislead consumers about the true

cost of credit by excluding some of their fees from the APR calculation.93 This expanded APR

definition is called the MAPR (Military APR). The Military Lending Act also preempts any

inconsistent state or federal laws; consequently, military personnel and their families are entitled

to whatever laws provide them with stronger financial protection.94 Like the Ohio Short-Term

Loan Act, the Military Lending Act prohibits lenders from distributing multiple loans

simultaneously to a customer.95 Because the Military Lending Act applies to all consumer loans,

except mortgage loans or purchase-money personal property loans, it should prevent lenders

from circumventing the law to issue usurious loans to military personnel and their families.96

While an empirical study has not been done, anecdotal evidence indicates that the Military

   Limitations on Terms of Consumer Credit Extended to Service Members, 32 C.F.R. pt. 232 (2006).
   See, e.g., Jason Gordon, Legal Assistance: the John Warner National Defense Authorization Act for
Fiscal Year 2007 and Protecting Soldiers Against Predatory Lending, ARMY LAWYER, Apr. 1, 2008, at
30. Both the statute and its implementing regulations are referred to in this Article as the Military
Lending Act. Some refer to them as the Talent-Nelson Amendment, probably because the bill pre-dating
the enactment was sponsored by Senator Jim Talent (R-Mo.) and Senator Bill Nelson (D-Fla.). See
Ronald J. Mann & Jim Hawkins, Just Until Payday, 54 UCLA L. Rev. 855, 871 (2007).
   See John Warner National Defense Authorization Act for Fiscal Year 2007, Pub. L. No. 109-364, §
670(a), 120 Stat. 2083, 2266 (codified at 10 U.S.C.A. § 987 (2008)) ("A creditor ... may not impose an
annual percentage rate of interest greater than 36 percent with respect to the consumer credit extended to
a covered service member or a dependent of a covered service member.").
   Truth in Lending Act, Pub. L. No. 90--321; 82 Stat. 146, § 106, effective May 29, 1968 (codified as 15
U.S.C. 1601)
   See 10 U.S.C. § 987.
   The Short Term Loan Act is codified under Ohio Revised Code 1321.35-1321.48, The Mortgage Loan
Act was codified under Ohio Revised Code Sections 1320.20-1320.21,1321.51 to 1321.60 and 1321.99.
Lending Act has been effective in reducing payday lending to military families and they have

increased access to low-cost, small dollar loans.97

B. Pro-Industry Bill Would Legalize Triple-Digit-Interest Rates Nationwide

        Some in Congress have recognized the need to extend the protection afforded to military

families to all Americans; however, pending bills fall short of this laudable goal. Illinois U.S.

Representative Luis Gutierrez (D-Ill.), who heads the House Financial Services Subcommittee

on Financial Institutions and Consumer Credit, introduced the bill known as the ―Payday Loan

Reform Act of 2009.‖98 The proposed bill requires lenders to provide specific disclosures to

payday loan customers99 and purports to extend protections of the Military Lending Act to all


        The bill prohibits creditors from providing payday loans to consumers unless notices are

posted in English and Spanish at the place where the loan is acquired.101 Furthermore, the

proposed bill provides consumers with an extended repayment plan if the consumer cannot pay

the loan by its due date. 102 Under the proposed bill, lenders cannot threaten or seek to have

consumers prosecuted in criminal court to collect outstanding loans.103 The Gutierrez bill also

prohibits lenders from taking a security interest in property to secure the loan.104

   See Nevada Lender's Legal Trouble Shows Perils of Internet Loans, A.F. TIMES, Sept. 8, 2008, at 34,
available at 2008 WLNR 26671041. Some lenders are providing loans to military personnel over the
Internet and two lenders have been issued a cease-and-desist order by the Nevada Department of
Business. Id. (issuing cease-and-desist orders to Military Funding USA Inc. and American Military
Funding Inc., both with Nevada addresses). Id. Even though many payday lenders no longer lend to
active-duty military members and dependents, these military families are able to get interest-free short-
term loans from military relief societies for legitimate financial emergencies and reasonably priced loans
from military-affiliated credit unions and banks. Id.
   Payday Loan Reform Act, H.R. 1214, 111th Congress, 1st Session (2009).
    Id. at §2 (amendment to Truth in Lending §129B 15-17)
    Id. at §(2) (iv)- Interest Free Extended Repayment Plan (amendment to TILA §129B 6-25).
    H.R. 1214 §2 (3) 16-20.
    H.R. 1214 §129(b)
        The Gutierrez bill, however, is flawed in its most critical component. It provides that:

―It shall be unlawful for a payday lender to require a consumer to pay interest and fees that,

combined, total more than 15 cents for every dollar loaned in connection with a payday loan.‖105

Critics rightfully argue that this provision of the bill will in effect give Congressional approval to

lenders that charge triple-digit-interest rates for payday loans.106 Americans for Fairness in

Lending contends that the rate of charging interest at 15 cents for every dollar translates into an

APR of 390 percent for two weeks or 780 percent APR for one week.107 Thus, Gutierrez’s bill is

―an ersatz reform that would allow payday lenders to charge at what amounts to an annual

percentage rate of 391 percent.‖108

       If the Gutierrez bill is passed unchanged, it will legalize nationwide triple-digit interest

rates for payday loans.109 The 50 states fall within the following three categories with respect to

payday loans: (1) states that ban predatory lending, (2) states that cap interest rates for payday

loans, and (3) states that place no cap on payday loans.110 Many states, such as Ohio and

Arizona, that have capped interest rates on payday loans that fall within the second category.111

Furthermore, since 2005, no state has passed legislation legalizing payday lending.112 Consumer

advocacy groups, such as Consumer Federation of America, assert that the Gutierrez bill would

stop state efforts to implement payday lending reform.113

    Id. at § (d) (1) 10-12.
    See Payday Loan Reform Act Does Not Contain Much Reform, Americans For Fairness in Lending,
    Andrew Rosenthal, Editorial, 391 Percent Payday Loan, N.Y. TIMES, April 13, 2009, at A20.
    See Payday Loan Reform Act Does Not Contain Much Reform, supra note 106.
    Posting of Ed Mierzwinski, US. PIRG Consumer Blog: Groups oppose ―Payday Lender Protection
Act‖, /archives2009/03/groups_oppose_[.html (March 25, 2009).
    See Payday Loan Reform Act Does Not Contain Much Reform, supra note 106.
        Upon close examination, the Gutierrez bill would be counterproductive to consumer

protection during tough economic times. Legalizing usurious interest rates would in essence

give the payday loan industry a bailout during a time when America is currently experiencing the

highest unemployment rates in decades. Thus, the average American desperate enough to obtain

a payday loan would be on the verge of financial ruin, which is inline with research

demonstrating a single payday loan doubles the risk that the consumer will end up in bankruptcy

within two years of obtaining the loan.114 Finally, legalizing triple-digit-interest rate loans

would defeat President Obama’s promise to cap payday loans at 36% and would deny American

consumers the protections provided by Congress to military personnel and their families.115

        Because the Gutierrez bill actually protects payday lenders and legalizes predatory

lending, consumer advocates have labeled it the ―Payday Lender Protection Act.‖116 Incredibly,

some payday lenders criticize Gutierrez's bill for setting the maximum interest rate ―too low‖;117

however, some republicans and payday lenders do support it.118 In short, the Gutierrez bill, if

enacted would place a stamp of Congressional approval on predatory lending. This would undo

years of hard work by many progressive states, harm even more Americans than are being

harmed today and likely be an absolute disaster.

C. Pro-Consumers Legislation Would Not Protect Consumers from Unreasonable Interest Rat

        Because of the lack of a federal usury cap on interest rates, consumers pay as much as

    Mierzwinski, supra note 112.
    David Hess, Gutierrez Tries To Thread Needle With Payday Loan Bill, CONGRESS DAILY,
Apr. 3, 2009.
    See Editorial, 391 Percent Payday Loan, N.Y. TIMES, Apr. 13, 2009, at A20
$8,600,000,000 annually in fees for payday loans.119 To combat the stripping of wealth from

payday borrowers, Senator Richard J. Durbin (D-Illinois) introduced the Protecting Consumers

from Unreasonable Credit Rates Act of 2009 in order to establish ―a national usury rate for

consumer credit transactions.‖120 Durbin expressed outrage over payday loans that charge triple-

digit interest rates: ―[e]xcessive rates (interest rates of two and three hundred percent) can have

crippling effects on those individuals who can afford it least.‖ 121 Unlike the Gutierrez bill,

consumer protection proponents support Durbin’s bill.122

        Durbin’s bill seeks to bring federal law inline with several states that have usury laws that

cap interest rates at 36% or less.123 Like the Military Lending Act, Durbin’s bill would cap

interest rates at 36%.124 The 36% interest rate cap is fair to consumers and arguably ensures

payday lenders will obtain a reasonable profit.125 The bill defines fee and interest rate as the

following: ―all charges payable, directly or indirectly, incident to, or ancillary to, or as a

condition of the extension of credit.‖126 This definition also includes annual fees, cash advance

fees, membership fees, late fees, insufficient funds fees, overdraft fees, and over-the limit

fees.127 This broad definition is meant to prevent lenders from excluding some fees from the

    Protecting Consumers from Unreasonable Credit Rates Act of 2009, The original bill introduced as S.
500 IS, 111th Congress, 1st Session. Full Text is available at
    Press Release, Dick Durban: Durbin Introduces Bill to Crack Down on Excessive Interest Rates (July
18, 2008).
    See Payday Loan Reform Act Does Not Contain Much Reform, supra note 106 (stating that the
consumer groups that support Durbin’s Bill and oppose Gutierrez’s bill include ACORN, Consumer
Federation of America, Consumers Union, National Association of Consumer Advocates, National
Consumer Law Center, National Fair Housing Alliance, National Community Reinvestment Coalition,
and U.S. PIRG).
    See Protecting Consumers from Unreasonable Credit Rates Act of 2009, at § 141(a).
    See infra notes 249-250 (discussing a pilot program demonstrating the profitability of short-term loans
with APRs less than 36%).
    Id. at § 141(b)(1).
APR calculation.128 The bill prohibits payday lenders from charging origination fees, check

cashing fees, insurance premiums, and other deceptive fees.129 Furthermore Durbin’s bill would

impose civil penalties and prison sentences on lenders that violate the law.130

        Durbin’s bill, however, still falls short of providing needed consumer protection. For

example, section 141(b)(2) of the bill has the heading ―Tolerances.‖131 This section provides

that the above definition of fee and interest rate does not include ―credit obligations that are

payable in at least 3 fully amortizing installments over at least 90 days.‖132 Furthermore, under

the Tolerances section, for loans of $300 or more, lenders can charge additional fees, including

origination fees of no more than $30, and late fees of either $20 or a fee authorized by state

law.133 Lenders will draft loan contracts to circumvent the purpose of the legislation. For

example, if the loan is payable in three installments and has a 90-day maturity date, lenders will

be allowed to charge origination fees between $30 and $120 on loans of $300 dollars or more.134

In order to prevent this result, Durbin’s bill should eliminate the Tolerances section. As

proposed, Durbin’s bill is not an adequate solution to predatory lending.

        Dublin, as a senator from Illinois, should be aware that payday lenders will circumvent

any rule in order to charge APRs higher than allowed by law. For instance, when the Illinois

General Assembly passed the Payday Loan Reform Act, which set an APR cap at 400% for loans

    Durbin, supra note 121.
    Id. at § 141(b)(2)
with terms 120 days or less, many payday lenders started issuing loans for more than 120 days

and charging APRs in excess of 400%.135

       In summary, neither the Durbin nor the Gutierrez bill is worth passing as they will not

provide reasonably-priced loans to all Americans. The Military Lending Act in effect affords

military families a right to reasonably-priced136 short-term credit. That right should be afforded

to all Americans. As expounded in the next section, if payday loans are predatory and, therefore,

bad for the troops and their families, they are predatory and consequently bad for ordinary



       As discussed previously, Congress had no difficulty passing legislation to protect troops

but cannot seem to muster the political will to protect ordinary Americans from payday lending.

The subtext of the debate over whether to pass legislation to protect all Americans is that soldiers

and their families are deserving of protection while ordinary low-to-moderate income consumers

who rely on payday loans are not. The discussion below demonstrates that military families have

a solid safety net while ordinary civilian families do not. Social compact theory was used to

justify protecting military families from unreasonably-high short-term credit, thereby expanding

the safety net of military families. If military families, the subset of Americans with a strong

safety net, needed protection from payday loans, surely ordinary civilians, the subset of

Americans with a weak safety net, need protection as well.

  See Illinois Div. of Financial Institutions, Illinois Payday Loan Reform Act Three Year
Report, March 2009, at 3, available at
    Most of readers probably would not consider a 36% APR reasonable; however, in comparison to
triple-digit interest rates of 390% or more, 36% is reasonable.
A. Military Families have a Strong Safety Net While Civilian Families Do Not

        In comparison to the average civilian family, the average military family shows is

substantially better off. The discussion below demonstrates that while the average civilian

American is suffering, military personnel and their families enjoy income security, educational

benefits, healthcare coverage, housing allowances, and other benefits. The discussion may cause

some to wonder why Congress decided to afford only to military families special protection from

payday loans.

        In the midst of the current economic crisis, unemployment rates continue to rise.137 In

2008, 2.6 million jobs were lost—the highest loss since 1945.138 In January 2009, 598,000 jobs

were lost.139 As of June, 2009, the unemployment rate was 9.5%.140 Studies have also suggested

that job losses have affected African Americans disproportionately more than Caucasian

Americans.141 This racial disparity is important because in some parts of the country African

Americans are more likely to obtain payday loans than Caucasians.142 Instead of an increase in

well-paying jobs, low-to-moderate income American workers can expect ―automation,

    See Liz Wolgemuth, What’s in a Number?, U.S. NEWS AND WORLD REPORT, July 1, 2009, at 46
(discussing what happens during a recession, including rising unemployment).
    Patrick McGeehan & Mathew R. Warren, Job Losses Show Wider Racial Gap in New York, N.Y.
TIMES, Jul. 13, 2009, at A1 (By the end of March, 2009, there were about 80,000 more unemployed
blacks than whites, even though there are roughly 1.5 million more whites than blacks in New York City.
Because of the disproportionate number of Blacks unemployed than Whites, the military could be an
attractive option for Black youths).
in its report that African Americans and Latinos make up a disproportionate share of payday loan
borrowers in California).
outsourcing, and the march of workers toward jobs in the [low-paying] service sector.‖143 Given

these bleak statistics, many Americans will remain unemployed or under-employed. As for

those civilians fortunate enough to have good jobs, they will face financial difficulties due to an

ever-shrinking compensation and benefits package.

      1. Compensation

         During this Great Recession few have financial security.144 With wages stagnant or

falling, everyone is being forced to stretch their money and do more with less purchasing

power.145 Although members of the military may face stresses not encountered by average

Americans, they do not have to worry about their job security or the loss of their next

paycheck.146 For example, in 2006, the estimated average (cash & non-cash) compensation for

an E-1 class, single 18 year old with less than two years experience, was $54,900.147 With cash

allowances and associated tax advantages, regular military compensation for the average enlisted

soldier exceeded the 75th percentile of civilian earnings.148 The average enlisted member earned

approximately $5,400 more in 2006 than his or her civilian counterpart when comparing just

cash compensation.149 The annual growth rate in regular military compensation for the active

    Liz Wolgemuth, Workers Do the Shuffle: The Labor Force is Shifting Toward Science and Health,
U.S. NEWS AND WORLD REPORT, July 1, 2009, at 38.
    See id. (stating that the unemployment rate ―is not expected to return to its prerecession lows anytime
    John Fales, Guarding Military Access, WASH. TIMES, May 21, 2009, at B03, (―Military service is not
only essential to our national security, it offers limitless opportunities for personal and professional
growth, job security in a troubled economy and a wide array of benefits, including funds for college.‖).
    Congressional Budget Office, Assessing Pay and Benefits for Military Personnel, ((Cash pay is regular military compensation (basic
pay, allowances for housing and subsistence, and the federal tax advantage that arises because those
allowances are not taxed). Noncash and deferred cash pay include the accrued value of veterans' benefits
and retirement benefits (pay and health care)).
Vol. 1, 2008 (The value of the additional tax advantages and benefits included in Military Annual
duty enlisted force as a whole was more than 2.2 percentage points higher than the employment

cost index – the measurement of the increase in civilian wages – on average, between 2000 and

2006.150 In an effort to boost military cash compensation, the across-the-board pay raise was set

0.5 percentage points higher than the increase in civilian wages—as measured by the

employment cost index (ECI) for private-sector workers—from fiscal years 2000 through


    2. Training

        In addition to job security with expected pay increases, military personnel are given

training for jobs that are available.152 The military offers assistance to soldiers for training so

they can improve their skills and become qualified for higher skilled and higher paid positions;

however, the private sector has no such cushion to rely upon, and thus workers must depend on

themselves or private loans to obtain the same training. The jobs that are available during the

recession require different skills than many unemployed workers possess.153 These skills may

require years of training and/or education.154 More importantly, acquiring these skills can be

compensation are 13 to 26 percent higher than Regular Military Compensation for enlisted members and
8 to 27 percent higher for officers).
    Congressional Budget Office, Assessing Pay and Benefits for Military Personnel, (regular military compensation (basic pay, allowances
for housing and subsistence, and the federal tax advantage that occurs because those allowances are not
    John Fales, Guarding Military Access, WASH. TIMES, May 21, 2009, at B03.
    See Wolgemuth, Workers Do the Shuffle, supra note 143(―Many workers will have to change their
habits and skills if they want to find work again.‖).
    Louis Uchitelle, Now Hiring, and Desperately Seeking, Specially Skilled Workers, N.Y. TIMES, June
24, 2009, at A1 (―[E]mployers are begging for qualified applicants for certain occupations, even in hard
times. Most of the jobs involve skills that takes years of attain.‖).
expensive. While most Americans pay out of pocket or take out loans for training expenses,

those in the military are enjoying subsidized training and are paid to obtain the training.155

      3. Education

         Besides job training, most civilians have to pay for their own college education while

military personnel receive free education, which can be used for a promotion or another career

after leaving the military.156 The average debt of a student upon graduation from college is

$20,000.157 In the 2007-2008 school year, total expenses for attending a public, four-year, out of

state school was $24,044, while expenses for attending a private, four-year, nonprofit school was

$32,307.158 Over the past decade, the total expenses for full-time students at private four year

colleges and universities has risen at an average rate of 5.3% per year, while total expenses for

full-time, in-state students at public four year colleges and universities have risen at an average

rate of 6.2% per year.159 With the cost of higher education on the rise, low and middle class

families are being priced out of higher education.160

         One option for healthy people who cannot afford college is to join the military. The

Education Savings Plan gives members who sign up for at least six years of active duty in a

    Fales, supra note 152. (Example: An in house mail delivery tech in a corporation would need to take
out private loans to acquire the training needed to become a secretary whereas the United States Military
provides funds for this kind of skills training to soldiers).
    United States Department of Veterans Affairs, (Educational Assistance
Allowance for trainees under the Montgomery GI Bill - Active Duty (Ch. 30 of title 38 U.S.C.).
    Jessica A. Johnson, Compromise Can Aid Pell Grants, Choice, COLUMBUS DISPATCH (OHIO), June 27,
2009, at 10A.
    College Board, Trends in College Pricing (2007), (The
annual change for tuition and fees (current dollars) for the 2007-08 school year for Private Four Year
schools went up 6.3% from the year before. The annual change for tuition and fees (current dollars) for
the 2007-08 school year for public four year schools went up 6.6% than the year before.)
    Jessica A. Johnson, Compromise Can Aid Pell Grants, Choice, COLUMBUS DISPATCH, June 27, 2009,
at 10A. (―The cost of attending college has increased at twice the rate of inflation over the past five years,
and concern is mounting that higher education soon will be out of reach for low-income and middle-class
―critical skill area‖ to $5,000-$30,000 in savings bonds to use toward their education.161 The

Montgomery GI Bill provides educational assistance if soldiers contribute $100 per month

during their first 12 months.162 Since August 2009, service members who have spent at least

three years on active duty can attend any pubic college at government expense or apply the

public subsidy payment toward tuition at a private university.163 This can be a significant

contribution considering the median debt load for public college graduates who borrow is

$15,500 and for a private college graduate is $19,400.164 Thus, not only do military personnel

receive assistance in refining and enhancing their occupational skills, but they also receive

assistance in paying for their educational expenses for career advancement. Soldiers can even

take advantage of these benefits after they leave the military. Employer-subsidized college

education is frequently not available to civilian Americans in the private sector.

      4. Health Care

         In addition to paying for their own college, an increasing number of American civilians

have to bear responsibility for their own healthcare insurance. In 2008, there were over 46

million Americans that lacked health insurance.165 Nine million of these are children.166 Two-

thirds of those without coverage earn around or less than $44,000 for a family of four.167 The

    Id. at 43.
    Lizette Alvarez, More Americans Joining Military as Jobs Dwindle, N.Y. TIMES, January 18, 2009,
    Elizabeth Warren, et al., A Ticket to the Middle Class: Working Off College Debt, at (last visited Oct.
7, 2009).
    Gov. Granholm Proclaims Week of March 22 as Cover Uninsured Week, U.S. FED. NEWS, June 2,
    Affordable Health Care Coverage: Hearing Before the Comm. on House Energy and Commerce
Subcomm. on Health, 11th Cong.(2009)( Testimony from Judy Feder, Senior Fellow at the Center for
American Progress Action Fund), [hereinafter Affordable Health Care Coverage] (―Roughly two thirds of
number of uninsured may only rise since health care costs are rising annually by double-digits168

and five times the rate of wages.169 The rise in costs makes it more difficult for employers to

afford health insurance for the employees, forcing many of them to drop coverage for their

employees or reduce their workforce.170 Civilian workers who had health insurance through

their employment before being terminated can continue their coverage through the Consolidated

Omnibus Budget Reconciliation Act of 1985 (COBRA).171 However, participating in these

COBRA plans for low and middle class America is nearly impossible since the premiums as a

share of unemployment income are 84.6% for families and 30.4% for single individuals.172 If

laid-off workers do not continue their employer-based coverage through COBRA and instead

seek coverage in the individual health insurance market, those with health problems will most

likely find that no insurer is willing to cover their pre-existing conditions at any price.173

       In contrast, heath care is free to military families.174 The Military Health Services

System provides medical care to active duty military personnel, eligible military retirees, and

eligible dependents of both groups.175 Those in active service do not pay enrollment fees or co

pays176 and receive free dental care.177 As a result, military families can use their income for

Americans without health insurance have incomes below 200 percent of the federal poverty level-or
approximately $44,000 for a family of four.‖).
    Gov. Granholm Proclaims Week of March 22 as Cover Uninsured Week, supra note 165.
    The Hill/AstraZeneca Policy Briefing: Hearing Before the Senate Finance Comm., 111th Cong. (2009) (
Remarks of Senator Max Baucus (D-Mont.) ), [hereinafter Breakfast Policy Briefing](stating that from
2000 until 2008, ―health care premiums rose five times faster than wages‖).
    Gov. Granholm Proclaims Week of March 22 as Cover Uninsured Week, supra note 1655.
    Family’s USA Foundation, Squeezed! Caught Between Unemployment Benefits and Health Care
    Military Personnel: Active Duty Benefits Reflect Changing Demographics, but Opportunities Exist to
Improve: Before the S. Subcommittee on Personnel, Committee on Armed Services, 107th Cong. 47-48
(2002), [hereinafter Military Personnel].
    Military Personnel, supra note 174, at 47. Those in active duty are required to enroll in TRICARE
Prime. Id.
other expenses and thereby have sufficient income to cover expenses not covered by the military

compensation package. Civilian workers, however, must spend more of their income on

premiums, deductibles, and co-pays to receive a shrinking level of heath care, and some workers

go without medication to make sure there is food on the table.178

      5. Housing

         Military personnel do not face the same housing costs as civilians. When a soldier is

living within a military installation, i.e., living ―on-post,‖ he or she pays no room or board.179

Single, junior personnel must live in the barracks.180 However, soldiers with dependent family

members receive a Basic Allowance for Housing (BAH), which is a supplemental monetary

allowance given to service members to minimize the cost of off-post housing.181 Other costs

associated with financing an independent household, such as utilities and amenities, are

supplemented for qualified personnel.182 The composition and size of these allowances are

determined by ―the member’s pay grade and dependency status as well as the cost of suitable

civilian housing for the member’s income level in the geographic housing.‖183

         An American civilian’s largest expense is usually housing.184 Currently, housing and

rental prices are rising while wages for American civilians remain stagnant.185 In addition, with

    Id. at 47.
    Id. at 47 (discussing how heath care is provided to those in the military). See also Affordable Health
Care Coverage, supra note 167 (―People without health insurance are more likely to delay care, to get
less care, and to die when they get sick.‖).
    Military Personnel, supra note 174, at 21.
    Id. at 48.
    Id. at 13.
    Id. at 21. BAH is subdivided into different categories that determine the amount of aid to the soldier.
Id. T These include ―partial-domestic, substandard family housing, with dependents and without
dependents.‖ Id.
    Id. at 48.
health care and other living expenses rising, American civilians are unable to afford their

mortgages.186 The problem is not limited to those with poor credit because even prime

borrowers are having trouble making their payments and some find themselves facing

foreclosure.187 Thus, military men and women, in comparison to civilians, have the financial

advantage of having their housing subsidized by the government.188

      6. Groceries

         Civilians are also facing additional financial pressure as they shop for food.189 The

average cost of food rose 5.5% in 2008,190 but those in the military can buy food without sales

tax and at cost. 191 As a result, military members can save more than 30% on their purchases.192

Meanwhile, the demand for government aid among civilians shows the toll that high food prices

are having on American families.193 For instance, in Illinois, food stamps have been given out to

42% more households in 2009 than five years ago.194 While some civilians may have too much

income to qualify for food stamps, a soldier’s combat pay is excluded from income when

determining whether his or her military family is eligible for the Special Supplemental Nutrition

Program for Women, Infants, and Children (WIC) and is also excluded when determining

eligibility under Supplemental Nutrition Assistance Program (SNAP), commonly known as food

    Press Release, Nancy Pelosi, Pelosi Statement on National Low Income Housing Coalition Annual
Report (April 7, 2008).
    Breakfast Policy Briefing, supra note 170 (stating that ―one and a half million families lose their
homes each year to foreclosure because of unaffordable medical costs‖).
    Merced: Ghost Town, USA, BUSINESS WEEK, June 29, 2009, at 38 (―Even so-called prime borrowers,
who had good credit when they got their loans, now are having trouble keeping up; about 5% of these
loans are in foreclosure, up from less than 1% in 2007, according to the Mortgage Bankers Assn.‖).
    Military Personnel, supra note 174, at 48.
    Dawn House, Strapped Shoppers Seek Bargains, Deals Amid Rising Food Costs: Saving? In-Store
Specials, Coupons Becoming More Popular as Prices Go Up, THE SALT LAKE TRIBUNE, June 20, 2009.
    Military Personnel, supra note 174, at 42.
    Illinois Struggles as Economy Keeps Sputtering, SOUTHTOWN STAR (CHICAGO), April 12, 2009, at
stamps.195 The irony is that Private Ryan’s family, because of his combat pay income, may be

financially better off than Shenequa’s family and yet his family may qualify for food stamps and

free food through the WIC program. It may be that Private Ryan’s family – and other military

families who previously would not have been eligible for assistance – can now qualify under

SNAP while Shenequa’s family, who may be worse off financially, will not be able to do so.

7.     Legal Protection

       Unlike Private Ryan, when the Shenequas of the world find themselves in need of a

lawyer, they usually have to pay their own legal fees. On average, an attorney costs $175 per

hour.196 In Oklahoma, for example, it costs around $100,000 to defend a lawsuit.197 Civilians

can seek help from organizations that provide free or inexpensive legal aid, but they have to be

very poor to qualify for this aid, and these organizations often do not provide the same level of

service as private attorneys.198 In contrast, legal services are free for the military personnel.199

This extends beyond just military matters; members can get free advice on personal matters such

as taxes, adoption, wills, bankruptcy, and more.200 An active duty soldier is guaranteed some

form of representation in court.201 If a judge advocate is unable to represent the soldier in a

civilian matter, a civilian attorney will be found to represent the soldier.202 In cases of financial

    Sens. Casey, Bennet, Johanns Introduce Bill to Protect Military Families from Being Cut Out of
Critical Child and Maternal Nutrition Programs, U.S. FED. NEWS, March 14, 2009.
    Joe Callahan, School Board Debates Hiring Staff Attorney, OCALA STAR-BANNER (FLA.), March 21,
    John Brock, Lawsuit Reform Good News for Oklahoma, TULSA WORLD, June 3, 2009, at A21.
    Karen De Sa, Rush to Find Lawyers for Parents: Firm Will Quit in June Quality of Dependency Court
Services Was Questioned, SAN JOSE MERCURY NEWS (CAL.), Feb. 23, 2008, at 1B.
    Military Personnel, supra note 174, at 50.
    Id. (―Service members and their families can receive free legal advice and assistance from judge
advocates or civilian attorneys for many personal, noncriminal matters.‖)
distress, creditors must abide by the military’s protocol in resolving the debt.203 Soldiers are

often considered a special class of citizens, and many laws protect soldiers in ways that differ

from the rest of the population.204 The previously discussed National Defense Authorization Act

is just one example. The Department of Defense also has the ability to further protect and

regulate the interactions of defense personnel and those who seek to take legal action against


        8.      Bankruptcy Relief Protection

        Military personnel also have an advantage over civilians when financial hardships

compel them to seek bankruptcy relief. Bankruptcy is usually a person’s last resort when they

are at devastated by financial crises.206 Civilians who file for bankruptcy do so under Chapter 7

or Chapter 13 of the Bankruptcy Code.207 Chapter 7 allows the debtor to discharge most debts,

but debtors can only file for Chapter 7 relief if the debtor passes the means test.208 This is a

complex test designed to ensure that Chapter 7 relief is available only to debtors who are truly

unable to repay their debts.209 If the debtor fails the means test, he or she must file under

Chapter 13, which requires a debtor's commitment to stick to a three-to-five year debt repayment

    Captain Jason M. Gordon, Legal Assistance: The John Warner National Defense Authorization Act for
Fiscal Year 2007 and Protecting Soldiers Against Predatory Lending, 2008-APR ARMY LAWYER 30, 34
(2008). Legal assistance attorneys advise soldiers on their legal troubles. Id. Primarily, the attorney
informs the soldier of the law that governs or pertains to the soldier’s situation. Id. Depending on
knowledge or experience, the attorney will advise the soldier of his rights or protections under the law.
    Id. at 30.
    See S. Comm. on Governmental Affairs 1 (2004) (Testimony of The Honorable Richard J. Durbin,
Ranking Member of the Subcommittee on Oversight of Government Management, the Federal
Workforce, and the District of Columbia) (―A declaration of bankruptcy is an extreme example of the
failure to manage personal finances.‖).
    David Colker, Chapters 7, 13 Have a Number of Differences, L .A. TIMES, June 28, 2009, at 4.
plan even though some of the debt would have been dischargeable in a Chapter 7 case.210

However, a debtor who is an active-duty soldier can avoid the means test altogether and wipe out

his or her debts under Chapter 7.211

        Space constraints prevent the author from providing a comprehensive discussion of the

host of benefits provided to military personnel and their families; however, the reader should be

persuaded that military families enjoy a strong safety net while ordinary civilians have a tattered

and torn safety net. As explained in the following section, the Department of Defense relied on

social compact theory to justify protecting military families from payday loans with triple-digit

interest rates.

B. Social Compact Theory is used to Justify Protecting the Troops from Payday Loans

        When the Department of Defense (DOD) added new regulations to implement the

consumer protections provisions of the Military Lending Act, it conveyed its official position

that it has ―developed a social compact [with military personnel] reflecting the Department’s

commitment to caring for their needs as a result of their commitment to serving the Nation.‖212

In describing this social compact as it relates the military’s financial readiness, the DOD

expressed a four-part strategic plan that includes ―[d]ecreas[ing] the prevalence of predatory

practices.‖213 Decreasing predatory practices is necessary as it ―provides protection from

financial practices that seek to deceive Service members or take advantage of them at a time of

vulnerability.‖214 The DOD’s current stance on predatory lending is an expansion of its financial

    Military Families Accomplish Mission of Reducing Debt, PROVIDENCE JOURNAL BULLETIN (R.I.),
Dec. 15, 2008, at A1 (explaining the National Guard and Reservists Debt Relief Act of 2008). National
Guard and Reservists Debt Relief Act of 2008, Pub. L. 110-438, §3197, 122 Stat. 5000, (2008).
    See Limitations on Terms of Consumer Credit Extended to Service Members and Dependents, 72 FED.
REG. 50580 (Aug. 31, 2007).
literacy goal as articulated in a 149-page report entitled A New Social Compact, which predates

passage of the Military Lending Act.215 In A New Social Compact, the DOD describes the

compact as a ―partnership between the American people and the noble warfighters and their

families [that] is built on a tacit agreement that families as well as the service member contribute

immeasurably to the readiness and strength of the American military.‖216

       Without using the words ―social compact,‖ several senators testified in support of the

then pending bill (now incorporated into the Military Lending Act) and expressed their belief

that ―we‖ owe it to the troops to protect them from predatory lenders. For example, Senator John

Warner stated ―we must reach down from time to time and provide a caring hand for particularly

those young men and women in uniform today who, unfortunately, can be victimized because of

their individual needs and requirements at a special time.‖217 What is troubling is that by voting

for the Military Lending Act, Congress implicitly endorsed the DOD’s social compact to protect

military families but, in the same vote, excluded ordinary Americans from protection.

       A review of American history reveals that fundamental to social compact theory is that

all humans are equal even though they differ in intelligence, virtue, and talent.218 Individuals

consent to form a government that respects the principal of fundamental equality and that

protects their inalienable rights to life, liberty, and the pursuit of happiness.219 The DOD has

concluded, and Congress has agreed, that predatory loans interfere with the ―quality of life‖ for

    Deputy Asst. Secretary of Defense, A New Social Compact, July 2002, available at
Reports/A%20New%20Social%20Compact.pdf [hereinafter A New Social Compact].
    Id. at 6.
    See 152 CONG. REC. S6405 (daily ed. June 22, 2006) (statement of Sen. Warner).
147-48 (2003).
    Id. at 148.
military families.220 The DOD’s official position is that payday loans are predatory due to

several factors, including the triple-digit interest rates and balloon payments and, therefore,

payday loans create a cycle of indebtedness. Similarly, Republican Senator Jim Talent, who

shares large responsibility for getting the Military Lending Act passed, testified on the floor: ―I

recognize that payday lending can be a risky business, but a triple-digit interest rate, which is

commonly charged today, is simply too much.‖221

        While it is laudable that Congress acted to protect young people who join America’s all-

volunteer military, the articulated reasons for why payday loans are predatory remain the same

for the civilian population. Civilians pay triple-digit interest rates and balloon payments, and

most cannot repay the payday loan by its initial due date.222 Besides these aspects of payday

loans, Congress acted to curb payday lending based on evidence that payday lenders were

targeting military personnel by opening businesses in close proximity to military bases and using

military-sounding names for their businesses.223 Payday lenders are issuing to civilians the same

loans with triple-digit interest rates and balloon payments and are targeting certain civilian

groups, especially minorities as they are disproportionately represented among payday loan

borrowers.224 For example, former employees of one Ohio-based payday lender testified that it

    See Limitations on Terms of Consumer Credit Extended to Service Members and Dependents, supra
note 212, at 50583 (stating that ―[the DOD] does not have sufficient control over the behavior of Service
members and their families to preclude them from taking on financial risks that can detract from not only
their quality of life, but also military mission accomplishment‖).
    See 152 CONG. REC. S6405 (daily ed. June 22, 2006) (statement of Sen. Talent).
    See, e.g., Martin, supra note 75, at 30-31(discussing previous studies showing most borrowers cannot
repay a payday loan in one loan cycle and discussing recent empirical study conducted by the author
showing most borrowers had multiple payday loans and rolled over payday loans for a year or more).
    See 152 CONG. REC. S6405 (daily ed. June 22, 2006) (statement of Sen. Talent).
that California Department of Corporations released a survey of payday loan borrowers revealing that,
targeted African-American borrowers in Washington, DC and surrounding areas225 and made the

employees use various strategies to increase the number of African-American borrowers.226

Congress should not view payday loans as magically turning into a viable short-term credit

option just because Shenequa obtains the loan and not Private Ryan.227 If payday loans are

predatory for military families, they are predatory for civilian families likewise.

        One may argue that the Military Lending Act protects military soldiers because they are

vulnerable due to participation in combat duty. However, the Military Lending Act does not

limit its capping of payday loans at 36% APRs for combat soldiers; it protects all active-duty

military personnel and their dependent family members.228 Thousands of military personnel will

never see combat duty due to their occupation or gender and will continue to work stateside and

live off-post in residential communities just like their civilian counterparts. However, these

military personnel not only enjoy numerous benefits not enjoyed by their civilian counterparts

but also have protection from predatory loans. In A New Social Compact, the DOD expressed

several goals, including its financial literacy goal, which entails educating military personnel and

their families on how to ―use good financial sense‖ and use their ―financial resources

responsibly.‖229 The DOD and Congress did not leave non-combat soldiers and the families at

―while they represent about a third of the overall adult population, over half of payday borrowers are
African American or Latino‖).
    See Statement of William Harrod, available at (last visited July 9, 2009) at 2 (stating that ―[w]e
didn’t restrict our marketing to businesses in the District [of Columbia][;] [w]e went into Maryland, to
College Park, Landover, Laurel, Bowie – always to areas with a high percentage of black customers‖);
Statement of Michael Donovan, at (last visited July 31,
2009) (A former Caucasian store manager testified ―[w]e seek out low-income African-American and
Latino neighborhoods because we know that this is where our most profitable client base is located.‖).
    See, e.g., Harrod, supra note 225, at 2 (A former African-American store manager testified that he was
instructed to visit an African-American church to get into the ―customer base‖ and to pay the pastor a $20
referral fee for each member sent to the payday lender).
    Both of these persons are fictional characters introduced in the beginning of this Article.
    See 10 U.S.C. § 987 (2008).
    See A New Social Compact, supra note 215, at 50.
the mercy of a free market infested with predatory lenders. In passing the Military Lending Act,

Congress did not require military families living and working stateside to lean on their own

―good financial sense‖ and learn in the school of hard knocks lessons on how to avoid predatory

lenders. Since Congress has concluded that financial literacy education is insufficient to prevent

military personnel and their families from getting ensnared by payday loans, it should do the

same for all Americans and pass legislation protecting them from payday loans.


       The above comparison of the financial situation of the average military family with the

average civilian family shows that military families enjoy much greater employment benefits and

insulation from predatory payday loans—all thanks to the United States government and

taxpayers. Ohio, among other states, serves as an example of the need for federal regulation of

payday loans.230 As long as the regulation of payday lending is left to the states, payday lenders

will find ways to frustrate state lawmakers’ attempts to protect their citizens from predatory

lending. However, pending federal bills that would regulate payday loans leave too many

loopholes for predatory lenders to continue business as usual.231

       Congress should take a multi-layered approached to payday loans. First, to drive out of

the market place lenders that charge triple-digit interest rates, Congress should cap all payday

loans at 36% APR and define APR broadly like the Military Lending Act to include fees that are

really disguised finance charges. Because banks are now in the payday lending business, no

financial institution should be exempt from the 36% APR cap. Second, Congress should pass

legislation that would create the Consumer Financial Protection Agency (CFPA), which would

  See supra notes 47-65 and accompanying text.
  See supra notes 120-35 and accompanying text (explaining how Senator Durbin’s bill, Protecting

Consumers from Unreasonable Credit Rates Act of 2009, makes the threshold for tolerances too low).
have several responsibilities, including having enforcement authority over bank and non-bank

lenders and the ability to inform consumers about safe financial products.232 This agency is

necessary because it could keep abreast and use its authority to stop payday lenders from using

subterfuge to circumvent the 36% APR cap.233 Third, as explained more fully below, Congress

should pass legislation that motivates lenders to engage in responsible lending because, as is

evident from the subprime mortgage foreclosure crisis, too many lenders have no moral

compunction about the lives they leave in financial ruin in the pursuit of profits.

            A model for American legislation that will encourage responsible lending is the National

Credit Act passed in 2006 in South Africa.234 The National Credit Act prohibits ―reckless

credit,‖ which is defined in two ways. First, reckless credit is extended by a credit provider if it

failed to conduct a credit assessment as required by law, irrespective of what the assessment

would have determined.235 Second, if the credit provider did a pre-contract assessment of the

consumer’s credit as required by law, its extension of credit to that consumer is, nevertheless,

reckless if (1) the consumer did not understand the ―risks, costs or obligations‖ under the credit

agreement or (2) the consumer’s entering into the credit agreement made the consumer over-

indebted.236 Additionally, under the National Credit Act, a credit provider must not enter into a

credit agreement before assessing the potential borrower’s credit history and his or her ability to

    See Consumer Financial Protection Agency Act of 2009, H.R. 3126, 111th Cong. (2009).
    For more complete discussion about the proposed Consumer Financial Protection Agency, see Adam J.
Levitin, The Consumer Financial Protection Agency, AM. BANKR. INST. J., 10, 10-14 (2009).
    See National Credit Act 34 of 2005. See generally ML Vessio, What Does the National Credit
Regulator Regulate?, 20 SOUTH AFRICA MERC. L.J. 227, 227 (2008) (―The National Credit Act seeks to
make a fundamental change to the way in which the South African credit market operates, with specific
provisions intended to address undesirable practices and improve transparency and fairness.‖).
    National Credit Act 34 of 2005 s. 80.
repay the loan.237 If the consumer is borrowing the money for a commercial venture, the credit

provider must assess whether the venture is likely to be successful.238

       A consumer may use the defense of reckless lending in a collection action.239 If a credit

provider failed pre-contract to do the proper assessments required by law or the credit provider

ignored assessments that showed the consumer did not understand the agreement, a judge may

set aside all or part of the consumer’s obligations under the credit agreement.240 If the credit

provider gave the loan knowing the borrower was or would be over-indebted and the judge

determines a borrower is still over-indebted at the time of court proceedings, the judge may

suspend the agreement until the borrower can pay or restructure the borrowers’ obligations under

the agreement.241

       Current payday lending practices are the epitome of reckless lending. Lenders do not

perform traditional credit checks and do not require the borrower to disclose any of his or her

other debt obligations.242 However, lenders often lend amounts that exceed the borrower’s next

paycheck and require the borrower to repay the loan in a single balloon payment within 14 days

or less.243 As a result of these practices, borrowers will have to pay rollover fees to extend the

loan's maturity date because their next paycheck will not be large enough to cover repayment of

the loan and cover necessities such as rent and food.244 By banning reckless credit, Congress

will, therefore, force lenders to change their practices.

    National Credit Act 34 of 2005 s. 81.
    National Credit Act 34 of 2005 s. 83.
    Johnson, supra note 17, at 6-10.
    See PHANTOM DEMAND, supra note 10, at 3.
        The value of the National Credit Act’s prohibition against ―reckless credit‖ is that the

term is broad enough to cover all forms of predatory lending. Recent history has shown that

predatory lending is always evolving;245 therefore, traditional laws that prohibit specific practices

will always become outdated. But a law that prohibits reckless lending does not become

outdated because lenders will always have to ensure the borrower understands the terms of the

agreement and is not over-indebted. Lenders will be discouraged from evolving new predatory

practices because the borrower may always raise the reckless lending defense in any collection

action. Therefore, the solution to payday lending and other forms of predatory lending is a

prohibition on reckless credit.

        One may argue that the author’s proposal will lead to low-to-moderate income consumers

having access to less credit. Because payday loans and other predatory loans are the kind of

credit that has caused more economic harm to consumers than good, 246 a reduction in this type

of high-cost credit is needed. Moreover, although payday lenders and many banks are not

willing to extend credit at modest interest rates,247 some credit unions and banks are offering

loans at double-digit interest rates. As discussed previously, the FDIC issued Small Loan

Guidelines;248 but realizing that these guidelines were not enough, the FDIC instituted in 2008 a

two-year pilot program to encourage banks to offer reasonably-priced short-term loans.249 Banks

    See, e.g., Lifsher, supra note 73 (describing how payday lenders are issuing payday loans over the
Internet in partnership with Indian tribes as ploy to circumvent state usury laws).
    See Limitations on Terms of Consumer Credit Extended to Service Members and Dependents, supra
note 212, at 50581 (describing various terms and practices that make payday loans, tax refund loans, and
car title loans all predatory).
    See supra notes 74-80 and accompanying text.
    See Affordable Small Loan Guidelines, supra note 81.
    See The FDICs Small Dollar Loan Pilot Program: Results of the First Year, FDIC, (last visited Feb. 4, 2010).
participating250 in the first-year pilot program had flexibility in designing their own loan

programs but were required to meet minimum guidelines, including loan amounts of $2,500 or

less with low or no origination fees, no pre-payment penalties, APRs below 36%, and re-

payment periods for more than a single paycheck cycle.

        The first-year results of the pilot program indicate a measure of success. The pilot results

for loans of $1,000 or less (i.e., small dollar loans) are relevant to the discussion in this Article

because the average payday loan amount is under $1,000.251 The results show that the

participating banks originated 8,346 small dollar loans for a combined principal amount of $5.5

million.252 The average small-dollar loan size was $678, while the average loan term was

between 10-12 months and the average APR was 15%.253 The loan amount that was delinquent

30 days or more at the end of the first year was $184,636, or 7.3 percent of loans outstanding and

the charged off amount was $187,378, or 3.4 percent of loans originated under the pilot. 254

These delinquency and charge-off rates are close in line with the national averages for individual

loans industry-wide.255 Moreover, some of the participating banks believe they will achieve

short-term profitability for their small dollar loan programs, and most banks view their small

dollar loan programs as fostering goodwill and ultimately resulting in long-term profitably

through volume and cross-selling of additional products.256 Accordingly, the FDIC’s Small-

    The first-year pilot participants consisted of 31 banks, which are headquartered in 15 states with more
than 446 branches located in 26 states. Id. at 1-2.
    Banks in the pilot program had tor report separate results for loans not exceeding $1,000 and loans in
excess of $1,000 so the FDIC can determine whether $1,000 can be used to establish bright line rules for
a small-dollar loan program. Id. at 2.
    Id. at 3-4.
    Id. at 4.
    Id. n. 5, at 5 (stating that ―[i]ndustry-wide results showed that 2.6 percent of loans to individuals were
30 to 89 days past due in fourth quarter 2008, and 3.4 percent were charged off‖).
    Id. at 5 (stating that majority of participating banks sold other products to their small-dollar-loan
customers and that checking accounts were the most commonly cross-sold products).
Dollar Loan Pilot Program demonstrates reasonably-priced short-term loans with fair repayment

terms are profitable. Thus, Congress should not be fearful of capping interest rates on short-term

loans at 36% or prohibiting reckless lending because such measures are necessary to drive out

the consumer loan market financial institutions unwilling to offer affordable small-dollar loans.

        The National Credit Act’s prohibition on reckless lending is a good model for Congress

to follow because it would shift policy away from a deserving-undeserving paradigm. The

congressional record leading up to the passage of the Military Lending Act is replete with

statements suggesting the troops and their families are deserving of protection from predatory

loans. Unfortunately, this support-the-troops rhetoric that makes politicians fearful of doing

anything that is arguably un-American implies hard-working civilians with far less benefits than

military personnel are not deserving of protection. By prohibiting reckless lending, Congress

would put the burden where it rightfully belongs—on sophisticated financial institutions relying

on con artists, Wall Street wizards or statistical analysis to profit at any costs, even if their

products harm consumers.


        Unquestionably, those who serve America in the Armed Forces deserve financial

protections from predatory lending, but so does the rest of America. If payday loans ensnare

military families, who already receive numerous financial benefits, then surely payday loans

entrap in indebtedness even more civilians who do not have a government-provided safety net to

insulate them. In this time of economic crises, President Obama needs to deliver on his

campaign promise and use his power to influence Congress to pass a law placing 36% APR caps

on payday loans and, thereby, extend the protection it has afforded to military families to all

American families.

       Congress should also follow South Africa and prohibit all financial institutions from

engaging in reckless lending in order to foster the expansion of reasonably-priced small dollar

loans with fair repayment terms. Right now, banks and non-banks alike are causing too many

Americans to suffer economic disaster because they continue reckless lending when they fail to

do any assessment of a borrower’s ability to repay, charge triple-digit-interest rates, issue loans

in excess of the borrower’s next paycheck, and require loans to be repaid in a single payment

within 14 days. Prohibiting reckless lending will not bring an end to short-term small dollar

loans in America; rather it will promote profitable, yet fair loans by responsible lenders.

Moreover, the credit unions and banks that now offering reasonably-priced small dollar loans can

then expand their small dollar loan programs and emerge as a viable alternative to payday loans.


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