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John Bacino on January 24, 2007 - 10:33am
By Steve Doherty and Dan Geldon Wednesday January 24, 2007 Billings Gazette The Pentagon has a lot on its hands these days - keeping the peace in Iraq and Afghanistan, destroying al-Qaida and other terrorist infrastructure, and so on. But last year, it found itself preoccupied by another problem. Predatory "payday" loans, our military leaders suggested, threatened our military readiness by reducing the quality of life of our fighting men and women. Anyone with a checking account can obtain a payday loan by giving a postdated check for one amount in exchange for a smaller amount of cash. This type of cash advance can be convenient, but lenders charge astronomically high interest rates if the borrower misses a payment. The average interest on payday loans in Montana, for example, is 521 percent (the sixth highest in the nation). In contrast, credit card companies generally charge about 30 percent interest for cash advances. Stuck in a debt trap The result of high interest is that if a check bounces for any number of reasons - like a health emergency or layoff in the family - the borrower gets stuck in a debt trap almost impossible to climb out of. Too often, our neighbors enter a transaction for some quick cash and leave it in financial ruin. The only way out for many borrowers is to declare bankruptcy. No wonder the military was concerned when it discovered that 20 percent of our servicemen and women use this type of loan. Last fall, Chief Master Sgt. Robert Moore at Malmstrom Air Force Base explained the problem to the Great Falls Tribune: "We expend a lot of time and energy helping them get their debts under control so they are more ready and capable to perform the mission." Congress responded to this issue by imposing a 36-percent interest rate cap on payday loans to members of our military (the bill that included this provision passed 398-23 in the House of Representatives). Lending companies argued that the law would ultimately hurt soldiers by interfering with supply and demand and taking away a form of credit. The Pentagon didn't buy it: Soldiers would still have plenty of access to credit through credit card cash advances, small consumer loans, credit union loans, emergency assistance programs, and so on. The troubling story of how predatory lending became a national security problem raises an important question. How can a loan be predatory and abusive when provided to one class of consumers but a healthy and beneficial part of the economy when provided to anyone else? Seventeen states see no difference and have imposed interest-rate caps on all types of payday lending. Legislators are now trying to add Montana to that list with HB29, a bill that extends the 36 percent cap for the military to everyone. This bill would apply to Montana's 121 payday lending stores, which together drained more than $8 million from the state last year, according to Center for Responsible Lending. Tabled in House committee Unfortunately, the Montana House Business and Labor Committee voted 11-5 to table the bill and thus prevent the whole Legislature from voting on it. Critics of the bill have argued that legislators should not interfere with supply and demand. That sounds a lot like what critics of the military cap argued last year, only to be rebuffed by the Pentagon and both political parties in Congress. Nobody wants the government to interfere with the economy more than necessary, but almost everyone supports laws that protect consumers from unscrupulous business practices. That's why we make sure toys are safe for our kids and home foreclosures happen only under certain circumstances and following certain procedures. It's also why governments have regulated the lending industry for as long as there have been governments. Even the books of Deuteronomy and Leviticus place significant limitations on lending "upon usury." Sometimes the community suffers too much when we follow supply and demand wherever it takes us. No type of practice in the credit industry is crying out for regulation more than payday lending. The Legislature ought to follow the lead of Congress and other states and protect innocent, hard-working families against these unfair practices. It has the power if it can find the will. Steve Doherty of Montana is the former minority leader of the Montana Senate and co-chair of the Progressive States Network. Dan Geldon of Massachussetts is a former staff member for the U.S. Senate Judiciary Committee who has written extensively on bankruptcy and credit issues.