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Addressing what has been called a national security problem, Congress is reining in payday lenders’ loans to military personnel by placing a 36% cap on the transactions. The cap has been placed in the Department of Defense authorization bill for the next fiscal year, along with a ban on lenders’ mandatory arbitration clauses in contracts with service members. The House and Senate conference commitees approved the bill late last month. The fight between consumer advocates and payday lenders over interest rates, mandatory arbitration clauses that prevent consumers from suing lenders and lenders’ business practices has triggered a number of class actions around the country. They have also triggered state and local ordinances restricting interest rates on payday lending. [NLJ, March 20.] A payday loan, which the loan industry calls a “deferred presentment transaction,” is a small, short-term cash advance to a customer with a bank account and a steady income, regardless of credit history. Typically, payday loans are made for two-week periods, and borrowers are charged $15 per $100 loaned. Problems arise when a borrower cannot cover a loan at the end of the term and must roll it over to the next payday, and then successive pay periods. The lender tacks on additional service fees with each rollover that can compound into three-figure interest rates. The Defense Department, concerned with the effect that high-interest debt was having on morale and military readiness, had identified payday lending last year as one of 10 key “quality of life” issues it would seek to address with state governors and legislators. F. Paul Bland Jr., a staff attorney at Trial Lawyers for Public Justice, a Washington-based public interest law firm, said Congress’ interest rate cap and the ban on mandatory arbitration “raises some big policy questions for the next Congress.” He added that “if mandatory arbitration is so unfair when lenders impose it on military personnel that it threatens our national security, why is it fair to impose these clauses on other consumers?” Lynn Drysdale, a staff attorney at Jacksonville Area Legal Aid in Florida who represents service members in cases against payday lenders, said that “[i]f it’s bad for the military to have to pay 390% interest on a short-term loan, it’s just as bad for any other person to have to pay 390% interest on a short-term loan.” But Darrin Andersen, president of Community Financial Services Association of America, a national trade association of payday-advance companies based in Washington, said that the new restrictions only limit credit options for service members. He predicted that the industry eventually will stop lending to military personnel altogether. Interest on loans to military personnel account for only 1.5% of revenue across the industry, he said. He added that a 36% rate cap makes it unfeasible for payday-advance stores to make loans because it limits them to charging a $1.38 fee per $100 advanced. “If Congress really wanted to protect members of the military, they should have passed legislation that provides appropriate protections for military customers while allowing reputable lenders to stay in business and service growing demand for short-term, small-denomination loans,” said Andersen.

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