Research Helps Spur Congress to Protect Military Families
Christopher L. Peterson A study co-authored by a University of Florida law professor recently helped spur the U.S. Congress to pass legislation protecting military families from predatory lenders who charge interest rates that can reach well into the triple digits.
The study co-authored by Christopher L. Peterson, an associate professor at UF’s Levin College of Law, and Steven M. Graves, an assistant professor of geography at California State University, surveyed more than 13,000 zip codes and found that payday loan companies clustered in areas near military bases.
The findings were cited in a report by the Pentagon, and last month Peterson testified before the Senate Banking Committee. On Sept. 29 Congress agreed to legislation prohibiting lenders from imposing an interest rate of more than 36 percent on loans to members of the armed forces or their dependants.
“It’s just fantastic,” Peterson said. “It’s probably the most consumer-friendly legislation Congress has passed in a generation.” Congress may have been moved, he said, by the irony of claiming to support the troops while at the same time allowing them to be preyed upon by the predatory lending practices of the payday loan companies. Payday loans are high-interest loans intended to tide the borrower over to his next paycheck. In a typical payday loan, a lender might give a borrower $100 cash in exchange for a post-dated check for $115. When the loan comes due, typically two weeks later, the lender cashes the check, recouping his $100 plus a $15 “lender’s fee.”
If the borrower doesn’t have enough money in the bank when the loan is due, he can always refinance—by borrowing more money on the same terms. Known as a “rollover,” this practice can quickly turn a small loan into a sizable financial obligation. Charges for payday loans vary, but a typical lender will charge around $17 or $18 for a two-week loan of $100.That’s roughly equivalent to an annual interest rate of 450 percent.
Peterson hopes the limits placed on loans to military families can someday be made on loans to civilians as well.
“These kinds of loans are being made to people from all walks of life,” Peterson said. “If it’s good for military sevice members it ought to be good for everybody else, too. Nevertheless, I think this is a step in the right direction and something to build upon.”
Peterson has been studying predatory lending for years, and is the author of Taming the Sharks: Towards a Cure for the High Cost Credit Market, which received the American College of Consumer Financial Services Attorneys’ Best Book of the Year Award for 2004.
Peterson and Graves mapped payday loan locations in 20 states, including 109 military bases, and found that ZIP codes near military bases consistently had higher numbers of payday lenders than nonmilitary ZIP codes of similar population and demographic makeup.
Military personnel make good targets for the payday loan industry, Peterson said. Junior enlisted personnel often have low salaries and little experience managing money. Because the military frowns on nonpayment of debt—delinquent soldiers can face demotion, loss of security clearances, and even discharge—lenders can be confident they will be repaid.
Peterson believes the research he and Graves did may have influenced some leaders at the Pentagon, which cited the study in a ground breaking press release and in talking points for its legislative affairs personnel.
“I got into this business thinking I wanted to make a difference, and then I realized that’s completely a pipe dream,” Peterson said. “But I think we actually made a difference on this one. We kind of helped this happen,”