GAINESVILLE, Fla. — 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, Housing and Urban Affairs Committee, during which Sen. Elizabeth Dole of North Carolina referred numerous times to the research done by Peterson and Graves. On Sept. 29, just 15 days after Peterson’s testimony, 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.”
Lynn Drysdale, a leading consumer advocate and an attorney with Jacksonville Area Legal Aid, said the report by Peterson and Graves was instrumental in getting the legislation passed. Their impact on the success of what she called “a truly significant piece of legislation” cannot be overstated.
“The report they did really got this whole ball rolling,” Drysdale said.
Congress may have been moved, Peterson 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 service 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.
In addition to capping interest rates, the bill also prohibits mandatory binding arbitration in contracts with military service members. Critics of arbitration argue that it is a more expensive, secret system designed by big business to deflect rather than resolve consumer complaints. This ban, Peterson said, creates an exciting new exception to the Federal Arbitration Act, a law which many believe is being used by big business to deny consumers access to the civil justice system.
The legislation is also significant because it is the first effort Congress has made to close a loophole in federal banking regulation that allows banks to ignore usury laws. Unlike state usury laws, the new 36 percent interest rate cap for military personnel applies to all creditors equally, including banks.
“Although the interest rate cap only applies to the military,” Peterson said, “it is a promising development in consumer law that might point the way toward better consumer protection for all Americans.”
UF Law Dean Robert Jerry said it’s unusual for a law professor so early in his career—Peterson began teaching in 2003—to make such a significant impact on the law. “This is just an example,” he said, “of how research can reach beyond the classroom to benefit citizens.”
Peterson believes the research he and Graves did may have influenced some leaders at the Pentagon, which referred to 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.”
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