DEAR PRESIDENT OBAMA: YOU PROTECTED THE TROOPS; NOW
FULFILL YOUR PROMISE TO PROTECT ALL AMERICANS FROM PAYDAY LOANS
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 (email@example.com), 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, http://www.paydayloaninfo.org/stateinfo/SC.asp (last visited Feb. 4, 2010).
As a private citizen, Shenequa has very little financial protection from the predatory practices of
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,
http://www.rtoonline.com/images/Obama08PlanToStrengthenEconomy.pdf (―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
http://www.americanprogress.org/issues/2009/03/pdf/payday_lending.pdf (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 http://www.responsiblelending.org/payday-lending/policy-legislation/states/king-ohio-
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).
See, e.g., See LESLIE PARRISH & URIAH KING, CTR. FOR RESPONSIBLE LENDING, PHANTOM DEMAND:
SHORT-TERM DUE DATE GENERATES NEED FOR REPEAT PAYDAY LOANS, ACCOUNTING FOR 76% OF TOTAL
VOLUME 2, 6 (2007), available at http://www.responsiblelending.org/payday-lending/research-
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://
www.policymattersohio.org/pdf/TrappedInDebt2007.pdf [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),
http://www.occ.treas.gov/ftp/release/2002-24a.txt (―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),
http://www.consumerfed.org/pdfs/paydayreport.pdf (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 http://www.house.gov/apps/list/hearing/financialsvcs_dem/fox_testimony.pdf
(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.
I. PAYDAY LOANS ARE A DEBT TRAP
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
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.
See URIAH KING & LESLIE PARRISH, CTR. FOR RESPONSIBLE LENDING, SPRINGING THE DEBT TRAP:
RATE CAPS ARE ONLY PROVEN PAYDAY LENDING REFORM 7 (2007), available at
http://www.responsiblelending.org/pdfs/springing-the-debt-trap.pdf (―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.‖).
See, e.g., URIAH KING ET AL., FINANCIAL QUICKSAND: PAYDAY LENDING SINKS BORROWERS IN DEBT
WITH $4.2 BILLION IN PREDATORY FEES EVERY YEAR 3-4 (2006), available at
http://www.responsiblelending.org/pdfs/rr012-Financial_Quicksand-1106.pdf [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‖).
See, e.g., JEAN ANN FOX & EDMUND MIERZWINSKI, CONSUMER FED'N OF AM. & U.S. PUB. INTEREST
RESEARCH GROUP, RENT-A-BANK PAYDAY LENDING 9 (2001), available at
http://www.consumerfed.org/pdfs/paydayreport.pdf (A North Carolina study found that more than 50% of
borrowers paid interest and fees that exceeded the initial loan amount.).
See MICHELLE KELLY-LOUW, ET AL., THE FUTURE OF CONSUMER CREDIT REGULATION 107 (2008).
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.
II. STATE RESPONSE TO PAYDAY LENDING
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 http://www.thebell.org/PUBS/news/2009/
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).
See HOWARD KARGER, SHORTCHANGED: LIFE AND DEBT IN THE FRINGE ECONOMY 78 (Berrett-
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
http://www.consumerfed.org/pdfs/Internet_Payday_Lending113004.pdf (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
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 http://www.thehousingcenter.org/docman/Download-
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
http://www.policymattersohio.org/pdf/NewLawSameOldLoans2009.pdf (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).
See generally JEAN ANN FOX & ANNA PETRINI, CONSUMER FED'N OF AM., INTERNET PAYDAY
LENDING 5 (2005), available at http://www.consumerfed.org/pdfs/Internet_Payday_Lending113004.PDF
(―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
CAN HELP YOU ACCESS YOUR DIRECT DEPOSIT EARLY[.] ASK ME HOW.‖76 When
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
https://www.wellsfargo.com/help/faqs/dda_faqs (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
http://www.nclc.org/issues/payday_loans/content/Bank_Prepaid_Payday_Loans.pdf [hereinafter Bank
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.
III. THE FEDERAL RESPONSE TO PAYDAY LENDING
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
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
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‖, http://stayic.uspirg.org/consumer /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 http://thomas.loc.gov/cgi-
Press Release, Dick Durban: Durbin Introduces Bill to Crack Down on Excessive Interest Rates (July
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
IV. MAKING THE CASE FOR PASSING FEDERAL LEGISLATION TO PROTECT ALL AMERICANS
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 http://www.idfpr.com/dfi/ccd/3YearPLRAReportDFI.pdf
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
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).
UNITED STATES BUREAU OF LABOR STATISTICS, LABOR STATISTICS FROM THE CURRENT
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).
See, e.g., ARACELY PANAMEÑO & KEITH CORBETT, CENTER FOR RESPONSIBLE LENDING, ISSUE BRIEF
2, WEALTH STRIPPING PAYDAY LOANS TROUBLE COMMUNITIES OF COLOR (Oct. 2008); WEI LI ET AL.,
CENTER FOR RESPONSIBLE LENDING, PREDATORY PROFILING: THE ROLE OF RACE AND ETHNICITY IN
THE LOCATION OF PAYDAY LENDERS IN CALIFORNIA 2 (2009), available at
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.
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
UNITED STATES BUREAU OF LABOR STATISTICS, REAL EARNINGS IN JUNE 2009,
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,
http://www.cbo.gov/doc.cfm?index=8550&type=0. ((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)).
REPORT OF THE TENTH QUADRENNIAL REVIEW OF MILITARY COMPENSATION, Cash Compensation,
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
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,
http://www.cbo.gov/doc.cfm?index=8550&type=0 (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
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,
http://www.gibill.va.gov/GI_Bill_Info/rates/CH30/ch30rates080108.htm (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),
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
http://www.tobinproject.org/welcome/downloads/RP_Ticket_to_the_Middle-Class.pdf (last visited Oct.
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].
JOHN V. LUND, MILITARY PAY, BENEFITS AND RETIREMENT 39 (2004).
Military Personnel, supra note 174, at 47. Those in active duty are required to enroll in TRICARE
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
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
Id. at 48.
UNITED STATES DEPARTMENT OF LABOR – BUREAU OF LABOR STATISTICS, TABLE 5. COMPOSITION
OF CONSUMER UNIT: AVERAGE ANNUAL EXPENDITURES AND CHARACTERISTICS, CONSUMER
EXPENDITURE SURVEY, 2007, http://www.bls.gov/cex/2007/Standard/cucomp.pdf.
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
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
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).
See RONALD PESTRITTO AND THOMAS WEST, THE AMERICAN FOUNDING AND THE SOCIAL COMPACT
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).
See, e.g., WEI LI ET AL., CENTER FOR RESPONSIBLE LENDING, PREDATORY PROFILING: THE ROLE OF
RACE AND ETHNICITY IN THE LOCATION OF PAYDAY LENDERS IN CALIFORNIA 2 (2009), available at
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
http://ohiocoalitionforresponsiblelending.org/Harrod.pdf (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 http://www.cohhio.org/pdf/nr_09112007.pdf (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.
V. THE SOLUTION: CAP LOANS AT 36% APRS AND PROHIBIT RECKLESS LENDING
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
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,
http://www.fdic.gov/bank/analytical/quarterly/2009_vol3_2/smalldollar.html (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
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.