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New Law Caps Pay Day Loan Interest Rates Charged to Military Personnel

There are more companies providing Pay Day Loans in California than there are McDonalds fast-food chains. Most of them are in low income neighborhoods and many are clustered around military bases. Thi

New Law Caps Pay Day Loan Interest Rates Charged to Military Personnel

There are more companies providing Pay Day Loans in California than there are McDonalds fast-food chains. Most of them are in low income neighborhoods and many are clustered around military bases. This year a new federal law goes into effect to stop these store front lenders from charging members of the armed forces over 400-percent interest a year. And California lawmakers will try to pass a bill to put teeth into that legislation.  KPBS Reporter Alison St John has more.

It’s after dark when 20 year old Lance Corporal Andrew Lauk visits the brightly lit payday loan storefront on Oceanside’s main street,  a couple of miles from the front gate of Camp Pendleton. His youthful face is calm but his eyes are anxious. Tucking $100 into his wallet as he heads back to his car, he explains why he needs the money.

Lauk: Because I’m headed home to Colorado tomorrow and I need a little extra cash

St. John:  Is there anyone else you could get that cash short term?

Lauk: Sure, I could ask one of my friends.

St. John: So why do you chose to go to the pay day loan stores?

Lauk: Cause then I don’t have to deal with them asking me all these questions, it’s just in and out.     

Hire: The person who’s walking out of that facility doesn’t know they have a problem yet.

Michael Hire is with the Navy Marine Corp Relief Society, a service on base that offers help to marines who get into financial trouble. Hire says the trouble starts when two weeks after the marine has gotten the $100 loan, his paycheck is garnished  $117 dollars to pay back that loan with interest. He discovers he has less to get by on, and has to visit another pay day lender to take out a bigger loan. Each month he has less to live on, so he borrows more and more, and within months, his whole paycheck has disappeared before he can even touch it -- to pay back the loans.

Hire: The worst cases that we see are the young families that have tried to solve the problem themselves and they have repeatedly gone back to the payday lender, not understanding that all they’re doing is spending huge amounts of their money to pay off interest, and then they can't buy food, they cant pay their rent, then they cant make their car payments.

Studies suggest 15 to 25 percent of  all military personnel on bases around the country use pay day loan stores, and so many are in trouble because of the predatory lending practices that the Pentagon says it’s affecting national security. The number of personnel denied security clearance for financial reasons has multiplied tenfold since 2002.  Top brass say military readiness is undermined because so many soldiers and marines are worried about their debts. .

To address the problem Congress passed a law last year, capping interest rates for military personnel at 36 percent.  That law is due to go into effect in October. But some payday loan companies say they can't cover their costs with such low fees. Natasha Fooman is with Advance America.

Fooman: We do not want to get in the way of military readiness. Our company has pulled out of lending to the military in many states.

Advance America would have already pulled out in California but in this state they risk being sued for discrimination if they refuse to serve the military. That’s one reason why California Assemblywoman Lori Saldana is introducing a bill this month to complement the Federal law.  

Saldana: We need to make this a priority for our military families to be protected in California.

Saldana’s legislation would exempt the payday loan industry from sanctions if it stops serving the military. The bill would also put teeth into the federal law by designating a state agency to enforce the 36 percent cap.

Lance Corporal Andrew Lauk wonders what he’ll do if the payday lenders close their doors to him.

St. John: Do you think that’s fair?

Lauk: No I don’t because when we need that little extra cash maybe there’s that time when nobody can help you out and you absolutely need that little bit of extra cash. You have nowhere to go for it.

Banks don’t typically make such small short term loans, and observers worry that  without access to easy cash,  marines will fall pray to underground predatory lenders like those on the web that are impossible to regulate. That’s why the military has made education a key tactic in the battle against predatory lenders. Twenty-two-year-old Corporal Jonathan Whitworth says he’s heard so much about financial responsibility he’s sick of it.

Whitworth: In boot camp they teach us about finances, they harped and hammered about financial responsibility. We’re told “do not go to pay day lenders because they are going to rip you off.”

But even with ramped up education, young enlisted soldiers, Navy and Marines earning barely above minimum wage fall pray to the lure of easy cash, especially around the holiday season and after they get home from serving overseas.

Paul Leonard of the non-profit Center for Responsible Lending says the payday loan industry cannot use that threat as a reason to fight the coming legislation. He says even small loans can lead to financial ruin.

Leonard: There are a large number of people who are looking for emergency credit but who are not going to be able to pay it back, they are like people in the ocean who don’t know how to swim and for them,  it is more like throwing them an anchor than it is a tow line.  

Leonard says after legislation goes into effect to limit interest rates for service members, he hopes the next step will be to stop pay day lenders from charging such high interest rates to all low income families that fall prey to the lure of quick and easy cash.

Alison St John , KPBS News