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A small army of attorneys and state officials across the United States are taking on the “payday lending” industry, which they say makes illegal, high-interest loans to military personnel and low-income customers strapped for cash until payday. The U.S. Department of Defense, concerned with the effect that high-interest debt is having on its troops’ readiness, has identified payday lending as one of 10 key “quality of life” issues that it has addressed with state governors and legislators. The fight has triggered a number of class actions, as well as ordinances restricting interest rates on payday lending. Advance America Cash Advance Centers Inc. of Spartanburg, S.C., a payday lending industry leader, and other lenders are challenging a first-of-its-kind ordinance limiting the terms and amount of short-term loans and capping the annual interest rate at 36%. The ordinance was passed last October. Advance America v. The Consolidated City of Jacksonville, No. 16-2005-CA-007025 (Duval Co., Fla., Cir. Ct.). Jacksonville, Fla., where the local Legal Aid has represented sailors in several class actions against payday lenders, is near Mayport Naval Station and Jacksonville Naval Air Station, and home to 19 Advance America locations. North Carolina Attorney General Roy Cooper announced earlier this month that agreements with three companies to stop making illegal loans ended the major chains’ payday lending in that state. Advance America Cash Advance Centers of North Carolina Inc. has appealed the state banking commissioner’s order banning operation of its payday advance centers because it violates North Carolina’s Consumer Finance Act. In re Advance America Cash Advance Centers of North Carolina Inc., No. 05:008:CF (Wake Co., N.C., Super. Ct.). Also in North Carolina, five class actions are pending against payday lenders on behalf of all its citizens. The state hosts the Army’s Fort Bragg, Pope Air Force Base and the Marine Corps’ Camp Lejeune and Cherry Point Marine Air Station. Suing New Mexico Advance America and other payday lenders are suing New Mexico Attorney General Patricia A. Madrid over new regulations that cap payday lending interest rates at 54%. The litigation started after the New Mexico Senate killed a pro-industry bill that included allowing interest charges from 443% for a 14-day loan to more than 1,500% for a three-day loan. Fastbucks of Alamogordo v. Patricia A. Madrid, No. D-202-CV-200601204 (Bernalillo Co., N.M., Dist. Ct.). New Mexico’s payday lenders operate near its Holloman (Alamogordo) and Kirtland (Albuquerque) Air Force bases, as well as in Gallup, a border town near the Navaho and Zuni Pueblo Indian reservations. Last year, a New York intermediate appellate court upheld a trial court judgment won by state Attorney General Eliot Spitzer shutting down a payday loan operation and voiding hundreds of illegal loans to military families in the Fort Drum area. People v. JAG NY, No. 97440 (N.Y. App. Div. May 2005). Other jurisdictions-including San Francisco; Milwaukee; Phoenix and Tucson, Ariz.; and Tulsa, Okla.-have considered zoning ordinances to limit payday lenders. A payday loan, which the industry terms a “deferred presentment transaction,” is a small, short-term cash advance to a customer with a bank account and a steady income, irrespective of credit history. Typically, payday loans are made for two-week periods and borrowers are charged $15 per $100 loaned. For instance, a payday lender gives a customer $255 in cash on the spot in exchange for the borrower’s personal check or debit authorization in the amount of $300 against his or her bank account. The idea is that at his or her next payday, the borrower will have sufficient funds in the bank to repay the $255 advance and the $45 fee. However, problems arise when the borrower cannot cover the loan at the end of the term and must roll it over to the next payday, and then successive pay periods. At the same time, the lender tacks on an additional $45 service fee with each rollover. Allegations of ‘demagoguery’ The cash-advance industry insists that it provides a reasonable alternative to consumers who otherwise would have no access to emergency cash, claiming that it is unfairly maligned by those who lump it together with title pawn and check-cashing scams that prey on the poor. Steven Schlein, a spokesman for Community Financial Services Association of America, the national trade association of payday-advance companies based in Washington, called allegations that there is a problem with the industry “demagoguery,” with words like “predatory lending” thrown out to get media attention to try to put it out of business. “Complaints are raised by elitist consumer groups that don’t have realistic options for people who need low-amount, short-term loans. You can’t do it for any less than we do it, and if anyone can, we say, ‘Bring it on!’ ” Schlein said. “Usury limits don’t accommodate short-term, unsecured lending,” he said, alleging that banks charge 913% for overdraft protection and 1,300% for bounced checks. But consumer advocates, military commanders and others are concerned that payday lenders prey on young, unsophisticated, low-income borrowers whose difficult financial straits easily draw them into debt. They say payday lending runs afoul of state consumer protection and usury statutes. Christopher L. Peterson, a law professor who teaches consumer law at the University of Florida Levin College of Law in Gainesville, co-authored a study published in November 2005 that shows that payday lenders aggressively target financially vulnerable military families. “Predatory Lending and the Military: The Law and Geography of ‘Payday’ Loans in Military Towns,” 66 Ohio St. L.J. 653. “During the Great Depression and World War II, usury laws restricted this kind of thing,” Peterson said. “We got through those times without relying on those kinds of abusive practices. If these laws were good enough for the World War II generation, why aren’t they good enough for these days? It’s not like the reasons have changed.” The Department of Defense authorization bill for fiscal year 2006, signed into law in January, included an amendment offered by Senator Elizabeth Dole, R-N.C., requiring a 90-day Defense Department study of the extent and impact of predatory lending to the military. Schlein dismissed the allegation that the industry targets the military as “nonsense,” adding that “there’s a new article about who we’re targeting every few months. “We target people who make $25,000 to $50,000 a year and have bank accounts and jobs. There are lots of groups in that category,” he said. Advance America referred calls for comment to Peter Antonacci, a partner in GrayRobinson’s Tallahassee, Fla., office who represents the company in the Jacksonville ordinance case. Antonacci said that military commanders’ frustration with personnel who get into financial difficulties is the source of a lot of confusion about the product. “A first sergeant gets into trouble with debt and can’t concentrate on his work. When his commander asks him what the problem is, he says it’s a payday loan. The label sticks, though it’s usually something else,” Antonacci said. A payday loan in Florida is a “heavily regulated product,” he said, adding that borrowers are limited to one loan, there’s a waiting period between loans and a $500 limit. The system was reformed while Robert F. Milligan, a retired Marine two-star general, was the state comptroller, he said. Problems arise when people without credit who need quick cash opt for other alternatives, such as out-of-state lenders on the Internet, Antonacci said. The ‘rent-a-bank’ tactic Lynn Drysdale, a staff attorney at Jacksonville Area Legal Aid, said that the dozens of cases in which she has represented service members assigned to Mayport Naval Station and Jacksonville Naval Air Station against payday lenders “are no reflection of the magnitude of the problem.” On the one hand, “folks in the military don’t know they have access to legal aid and they don’t think they have any recourse,” Drysdale said. On the other hand, “if it gets out that you can’t handle your financial affairs, you can lose your security clearance,” which can hold up a service member’s deployment or reassignment. In some instances they even can get dishonorably discharged, she said. One obstacle that has faced lawyers suing payday lenders is what they refer to as the “rent-a-bank” phenomenon: payday lenders that try to get around states’ restrictive usury and payday-lending regulations and statutes by saying they are “agents” of out-of-state banks. As such, payday lenders have asserted that state consumer claims against them are pre-empted by the National Bank Act. But Joseph A. Smith Jr., North Carolina’s banking commissioner, rejected this view in a 54-page opinion ordering Advance America to “cease and desist” payday-lending operations. Another hurdle is arbitration clauses that payday lenders put in their loan contracts, particularly in light of the recent U.S. Supreme Court holding that arbitrators, not courts, have to determine the validity of an allegedly illegal contract containing a mandatory arbitration clause. Buckeye Check Cashing v. Cardegna, No. 04-1264. But Drysdale said that these problems crop up less than one might think, adding that a lender who claims to be an agent of an out-of-state bank cannot also claim that the arbitration contract in its own contract is enforceable. Typically, Drysdale asserts claims for usury and violations under three state laws-the deceptive and unfair practices act, the civil remedies for criminal practices act and the consumer collection practices act-and the federal Truth in Lending Act, she said. Ira Rheingold, general counsel of the Washington-based National Association of Consumer Advocates, said that the payday-lending model succeeds on the basis of people’s desperation. “They have clearly found a niche. There’s a real demand in this country for short-term loans and our banking system does not provide them. “The overriding theme here is that we have a dual banking system. There’s one for the middle- and higher-income people, and one for those who don’t fit into the traditional model, the lower-income people-which would include a lot of military people-which is comprised of the title pawn, check cashers, payday lenders and subprime auto [loans],” Rheingold said. “It’s extremely expensive to be poor in America,” he said.

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