A bill making its way through the California State Assembly just got a little tougher on payday lenders who do business with active duty military.
Assemblyman Ted Lieu (D-Torrance) recently amended Assembly Bill 1965 to include a 36 percent rate cap on all payday loan transactions with servicemen and women, a far cry from the standard 400 APR.
The addition further limits an already strict bill designed to loosen the industry’s legal vise on military customers, and has attracted the support of Assemblywoman Lori Saldaãa (D-San Diego).
The bill must make it out of the legislature by Thursday, Aug. 31 to survive.
The change came after the Department of Defense released a lengthy report Aug. 17 on predatory lending and its impact on military readiness. The report included various recommendations to lessen the cycle of debt incurred by active duty, all of which Lieu had previously promised to incorporate in the bill.
Capt. Mark Patton, commanding officer at the Naval Base Point Loma, heads a Navy Region Southwest task force on predatory lending that has supported Lieu’s legislative efforts.
“The marketing of these loans doesn’t help our sailors and Marines get out of debt; it drives them further into debt,” Patton said, adding that personnel can lose security clearance due to financial instability and render them ineligible for deployment.
Furthermore, the military offers a range of financial services and counseling to its men and women, and Patton argued that personnel don’t really need the services of a payday loan.
“We’re just being out-marketed,” he added.
Patton said the rate cap amendment has sparked opposition from the industry and pressure from lobbyists.
“We are trying to find immediate relief for a military readiness impact that is occurring today while our nation is at war,” Patton said. “[The legislators] are going to be asked to vote either for our military or for an extremely strong industry that did $2.5 billion in loans last year.”
On the issue’s timeliness, Patton said the bill sunsets in 2009, which emphasizes its function as a temporary solution. It’s not about killing the industry, he stressed, it’s about fixing a problem that is affecting the military.
“It’s the only way we believe we can impact the payday loan industry in California and protect our service members.”
With the illusion of a quick fix for money woes, payday loans have skyrocketed in popularity by providing instant cash with little hassle.
An advance of $255 requiring a one-time repayment of $300 two weeks later yields an APR of 459, said Patton, or nearly 700 percent if paid back in one week.
The problem, he continued, is that customers are expected to pay back their debt in one lump sum a few short weeks later. When they can’t, lenders often encourage back-to-back loans, a practice known as loan flipping. By the time the customer has enough cash to pay off the first, hundreds in interest has accrued.
Patton cited the lack of flexible repayment plans as the legal vise that grips many military customers, tightening with each successive loan. He said that increasing the repayment window to 120 days is one of the most important aspects of AB 1965.
The bill also stipulates that service members can opt out of “binding arbitration,” which essentially nullifies the customer’s right to file a civil suit against the lender.
Not exactly loans, payday advances are more accurately described as deferred deposit transactions whereby customers accept cash or a direct deposit into their checking account, which is to be paid back via check or automatic withdrawal. The distinction in unique to financial code in California, which is the only state that has declassified payday transactions from loan status.
Patton said it is for that very reason that AB 1965 is critical for the state, as similar legislation currently being discussed on the federal level might not protect California’s military.
“Even if federal action passes, California a few years ago made a deliberate decision to take the California deferred deposit transaction law, which is the fancy name for payday loans in California, out of the regular financial code,” Patton said.
And if the bill exits the legislature on time and is approved by the governor, Patton still anticipates a fierce reaction from an industry that has four to five lenders for every McDonald’s nationwide.
“[The rate cap] will probably be litigated for several years.”