Law to protect military personnel from high-cost loans in effect

By Tom Shean
The Virginian-Pilot

A federal law to protect military members from the costs of short-term, high-interest loans took effect Monday amid calls by consumer advocates to broaden the scope of the new rules.

The rules under the Military Lending Act include a 36 percent annual-percentage-rate ceiling on most payday loans, car-title loans and refund-anticipation loans made to military personnel and their families.

The act, signed by President Bush last year, "takes us a step forward in getting predatory lending back under control," Lauren Saunders, managing attorney for the National Consumer Law Center, said in a statement. "We only wish it applied to other credit that can be abusive."

The interest-rate ceiling that took effect Monday won't apply to car-title loans in Virginia because of the way they are defined in the state. In Virginia, car-title loans are treated as open-end loans, similar to credit card debt. The Military Lending Act defines them as closed-end loans, which they are in most states. Car-title lenders provide short-term, high-interest credit to individuals who put up the title of their car or truck as collateral.

Payday lenders will stop lending to the military because they can't make a profit under the 36 percent rate ceiling, said Steven Schlein, a spokesman for the Community Financial Services Association, a Washington trade association that represents payday lenders. However, the law's financial impact on the industry would likely be slight, Schlein predicted, because loans to service personnel account for only 1 percent of the industry's lending.

Advance America Cash Advance Centers Inc., a major payday lender with stores in Hampton Roads, stopped making loans to members of the military and their families last year in response to passage of the act, said Jamie Fulmer, a spokesman for Spartanburg, S.C.-based Advance America.

Payday lenders provide short-term loans, usually a few hundred dollars, at a rate of $15 for every $100 borrowed. For a two-week loan, that works out to an annualized rate of 390 percent. Borrowers must have a job or steady source of income and provide the lender with a post dated check for the loan amount and the interest payment. Payday lenders have argued that they are providing a service to working people, making cash available to individuals who need a modest amount until their next paycheck. Critics, however, contend that borrowers sometimes roll over the loans and eventually find themselves trapped by the interest payments.

John Hewitt, chief executive officer of the Liberty Tax chain of tax-preparation stores, said it's too early to measure the new law's impact on preparers who provide refund-anticipation loans. The loans are made through banks to individuals who are owed a refund but want the money quickly. The banks are repaid when the filer's refund arrives. Banks probably won't be willing to make the loans at a 36 percent interest rate, said Hewitt, founder of the Virginia Beach-based company. In a survey of refund-anticipation loans last year, the National Consumer Law Center and Consumer Federation of America pegged the interest rate for a loan of the average refund amount of $2,150 at 178 percent.

Tom Shean, (757) 446-2379, tom.shean@pilotonline.com