|December 7, 2004
Seeking Quick Loans, Soldiers Race Into High-Interest Traps
By DIANA B. HENRIQUES
From Puget Sound in the Northwest to the Virginia coast, the landscape is the same: the main gate of a large military base opens onto a highway lined with shops eager to make small, fast and remarkably expensive loans, no questions asked.
There are more than 200 of these quick-loan outlets around the Navy bases of Norfolk and Hampton in Virginia; almost two dozen around the Marine Corps base at Camp Pendleton in California; and three dozen within three miles of the Army's Fort Lewis in Washington State.
So the young Navy petty officer and her husband in the Puget Sound area had no trouble finding a willing lender when they wanted to borrow money between paychecks to show visiting relatives a good time.
Getting the loan was fast and convenient, too. To borrow $500, they wrote a $575 check to the lender, to be cashed on their next payday, less than two weeks away. But in accepting that instant loan, the couple, who would talk about their experience only if their identities were not disclosed, were also agreeing to pay a staggering annual interest rate of more than 390 percent. By contrast, a loan from a credit union would have taken several days or longer but cost no more than 18 percent.
Repaying their fast-money loan took a big bite out of the couple's next paycheck, leaving them short when other bills fell due. So they borrowed again, and again, until they had raised about $4,000 through more instant loans, some of them with official-sounding names like Military Financial Network.
The cost of this new money also mounted, ranging as high as 650 percent when expressed as an annual percentage rate, as the law requires. And as the couple continued to fall behind, they borrowed even more, from other kinds of expensive lenders.
By October, just days before the petty officer had to ship out for duty in the Persian Gulf, the debts had grown so large that the couple and their young children were about to lose their home to foreclosure.
Hardships like this are becoming more common in the military as high-cost easy-money lenders increasingly make service members a target market. As a result, many military people have become trapped in a spiral of borrowing at sky-high rates that can ruin their finances, distract them from their duties and even destroy their careers. The military, for its part, has done little to deny these lenders access to the troops, relying instead on consumer education.
At least 26 percent of military households have done business with high-cost instant lenders, an analysis of credit industry studies by The New York Times shows.
"It is getting worse, really - much, much worse," said Liz Kosse, director of a Washington State office of the Navy-Marine Corps Relief Society, a nonprofit group that helps service members like the petty officer.
When the sailor and her husband, a government employee, took out their first triple-digit loan, Ms. Kosse said, "none of this - the risks to their home and their livelihood - had ever occurred to them."
The couple asked Ms. Kosse to speak on their behalf because, she said, they were concerned about losing their security clearances and possibly their jobs if they were identified. The military considers excessive debt a security risk, saying it leaves a service member vulnerable to financial inducements to commit espionage.
Typically young, financially na´ve and often short of cash, military people present a lucrative customer base for high-cost instant lenders, known as payday lenders, as well as more traditional consumer finance outlets, whose rates can exceed 30 percent.
In the 37 states that allow them - up from 28 five years ago - payday lenders have opened a disproportionate number of outlets on the edges of military bases, a new study has found. And in the 13 states that bar them, payday lenders have nevertheless cropped up around bases in disguise, posing as catalog retailers or Internet cafes, regulators say. Besides sometimes adopting military names, they frequently advertise in base newspapers or operate online with special links to attract military customers.
The Community Financial Services Association, which represents about 60 percent of the payday industry, says its members provide a valuable service for people who need cash for emergencies. And the short-term loans, if paid off promptly, can cost less on an annual basis than a bounced check or a credit card advance, the group contends.
Steven Schlein, a spokesman for the group, denied that the industry specifically pursued military consumers. He said they made up only 2 to 3 percent of all payday loan customers. Most are young middle-income civilian families, he said.
Still, in response to complaints from the armed services, the association has set up an advisory council led by a retired Army general, and it has drafted a voluntary code of "military best practices" for payday lenders.
As payday lenders have gained ground, federal efforts to protect military people from high interest rates have had little success. A longstanding federal law, updated last year as the Servicemembers Civil Relief Act, requires that the interest rate on any debt that service members took on before they enlisted must be reduced to 6 percent when they go on active duty.
But there is no limit on the rates they can be charged after they enlist; a bill that would have imposed one stalled and sank in Congress this fall. And few if any high-cost lenders - even those repeatedly in trouble with regulators - have been declared off limits by the Pentagon or local commanders, military lawyers say.
But many military authorities say service people need more protection, especially in wartime. Sudden deployments can keep them from paying off debts. And besides being denied security clearances, service members can be discharged or even court-martialed for defaulting on debts.
Then there is the problem of distraction. "The last thing you want," said a retired Navy captain, Chalker W. Brown, now a vice president of the VyStar Credit Union in Jacksonville, Fla., "is a young sailor programming a Tomahawk missile in the Persian Gulf who is worrying about whether his car is being repossessed back home."
Armies of Debtors
The naval petty officer in Washington State managed to hang on to her home in the Puget Sound area; it was rescued by the Navy-Marine Corps Relief Society. But she could still lose her job. If she does, hers would not be the first military career ruined by payday lending, military officials say.
"I can remember dozens of cases where I or one of my legal officers had to sit down with young soldiers to try to help them dig their way out of a situation like that," said Lt. Col. Russell H. Putnam, a retired Army legal officer who is now chief of client services at Fort Stewart in Hinesville, Ga.
In a Pentagon survey in April, about 7 percent of service members said they had used payday loans in the previous year. But an analysis of industry studies casts doubt on that number.
Stephens Inc., an investment bank that tracks the payday industry, estimated that at least nine million households had used payday loans in 2002. Gregory Elliehausen, senior research scholar at the Credit Research Center at Georgetown University, said that a survey he did found that about 2 percent of payday loan customers were in the military.
It would be reasonable to conclude, he said, that 2 percent, or 180,000, of those nine million households are military families. That would be just under 26 percent of all military households, based on Pentagon personnel figures.
The interest rates they are paying are stratospheric. In Washington State, for example, the annual rates on a two-week payday loan are capped by law at just above 391 percent, but the effective annual rate on shorter-term loans is even higher, and Internet lenders are not subject to those limits. Some payday lenders near military bases in other states have charged annual rates as high as 780 percent, court exhibits show.
And yet business is booming, industry analysts say. From 1999 to 2003, the total payday loan volume nationwide increased fourfold, to $40 billion.
The presence of payday lenders on the doorsteps of most military bases across the country may be more than accidental.
Preliminary research by Christopher L. Peterson, a law professor at the University of Florida, and Steven M. Graves, a geography professor at California State University, Northridge, suggests that payday lenders are deliberately setting up shop close to military bases. The researchers are looking at the density of payday lenders around bases in 15 states and are finding that in most places there are far more payday lenders within five miles of the base than would be statistically likely.
"Their locational strategy suggests very, very strongly that they target military families," Professor Graves said.
He pointed to Oceanside, Calif., the home of Camp Pendleton. "That ZIP code has more payday lenders than any other ZIP code in California," he said.
Lenders in Disguise
No military bases in New York State were included in the professors' study, they said, because payday lending is illegal in the state. But that came as news to Tonya Duncan, whose husband is completing a year in Iraq with the Army in the 10th Mountain Division, a unit based at Fort Drum in Watertown.
Mrs. Duncan said she had borrowed money "about four or five times in the last six months" from N.Y. Catalog Sales, a local business on the edge of a mall parking lot near the base.
The catalog sales outlet is typical of a motley collection of high-cost lenders who regulators say are operating in disguise, chiefly in states like New York and North Carolina, which prohibit payday loans.
Their role as payday lenders seems clear to customers like Mrs. Duncan. To borrow $300 in cash from N.Y. Catalog Sales, she said, she writes a check for $390, which the catalog sales shop will not cash until payday. But there is a twist: in addition to $300 in cash, she gets $90 in gift certificates to spend on merchandise shown in a dog-eared catalog chained to the counter.
"So it's a loan, yes, but it's a loan with no interest," she said.
Stacy Kruse, another Fort Drum spouse who used to borrow regularly from N.Y. Catalog Sales, has a different view of the certificates. "We just threw them out," she said. "I looked at the catalog and it's just junk."
Besides, she said: "Who on earth would buy gift certificates to order stuff to be delivered months from now, when you can buy better, cheaper stuff at Wal-Mart the same day? Obviously, you go there to get a loan."
Eliot Spitzer, the New York attorney general, agrees. In September, his office filed a lawsuit accusing N.Y. Catalog Sales and the man listed as its "principal," an Alabama businessman named John A. Gill Jr., of making "unlawful and deceptive" loans.
Mr. Gill, in an affidavit, denied that he had a stake in the company. The store's regional manager, the wife of a soldier at Fort Drum, insisted in court filings that the stores did not make loans. The case is pending.
About 1,200 miles south of Fort Drum, in a string of storefront shops near the Jacksonville Naval Air Station in Florida, is another small business set up by Mr. Gill.
It used to do business as Florida Catalog Sales and is now called Florida Internet. One customer was Petty Officer Mark L. Foster Jr., 21, a helicopter mechanic at the base.
Last spring, just after signing a lease on an apartment, Petty Officer Foster was sent to sea earlier than he had expected. Unable to arrange for his rent to be paid in his absence, he said, he was evicted. The resulting expenses drove him to seek a $500 loan from Florida Internet.
The paperwork he signed gave him an "instant cash rebate" of $500. But it also obligated him to buy a year's worth of Internet access at the extraordinary price of $100 every two weeks. To cancel, he had to pay back $600 - the $500 "rebate" plus the initial $100 in "usage fees."
"I didn't want Internet access; I never used it," Petty Officer Foster said. All he wanted was the money, he said. He quickly realized that he could wind up paying as much as $2,100 in interest on his $500 loan, an annual interest rate of 420 percent. So he went to the local office of the Navy-Marine Corps Relief Society, which gave him an interest-free loan to pay off his $600 obligation.
Regulators in Florida contend that Florida Internet is an illegally disguised payday lender. In July, state prosecutors filed criminal racketeering charges against the company; similar charges were filed against Mr. Gill in September. Both he and Florida Internet have denied the charges and are awaiting trial.
Mr. Gill's lawyer, O. Hale Almand of Macon, Ga., would not comment "because of the pending criminal charges," he said.
Stars and Stripes That Sell
William H. Kennedy, a retired Navy captain and former commanding officer of the aircraft carrier Saratoga, remembers growing more upset the more he examined a traditional loan made to a sailor at the Mayport naval station in Jacksonville, Fla.
The sailor, troubled by the loan's terms, had come to Captain Kennedy in his new role as director of the local Navy-Marine Corps Relief Society office.
Captain Kennedy was bothered, for one thing, by the high annual interest rate: more than 32 percent. Then there were the extra fees: more than $420 on top of the $1,550 loan, most of them for credit insurance policies that the sailor, who had insurance through the military, probably did not need, Captain Kennedy said. And the extra charges were added to the loan, so the sailor was also paying interest on them.
But what really made Captain Kennedy angry was that the company that had made this loan and many like it, Pioneer Services of Kansas City, Mo., had been endorsed by an influential naval figure, Robert J. Walker, a retired master chief petty officer of the Navy who is a consultant to Pioneer.
Even military people who avoid the triple-digit payday lenders are not necessarily home free. Other lenders frequently use people with military affiliations to promote loans with high rates, fees and insurance premiums that drive up the cost of credit.
"Obviously, they're better than the payday lenders," Captain Kennedy said of these companies, "but these are still very high fees and rates."
The credit insurance sold to most Pioneer borrowers is "a waste of money," said Jean Ann Fox, consumer protection director for the Consumer Federation of America. Most military people have ample insurance, she said, and if they want more to cover a debt, "there are far less expensive ways to get it."
Mr. Kennedy did not stew about Pioneer, he said. "I complained to Bob Walker personally," he said, "because I just can't understand why he would be promoting loans like this for service people."
Pioneer Services, which also offers mortgages and insurance, has served about 650,000 military families over 20 years, according to Joe Freeman, its director of corporate communications. Its president, Patrick McCarty, is a second-generation West Point graduate. Its paid consultants also include Sgt. Maj. Jack L. Tilley, who was the top enlisted officer in the Army until his retirement last January.
The company believes that its loans and credit insurance products are reasonably priced, Mr. Freeman said, and its retired military consultants share that belief.
"As men who have worked with and for enlisted personnel throughout their distinguished military careers, they believe Pioneer responsibly and ethically provides needed financial services and educational programs to help military families," Mr. Freeman said, speaking on their behalf.
Pioneer says it has lobbied against the spread of high-cost payday lending and supports a host of military charities and events. But its highly effective "affinity marketing" program - using people with military affiliations to help promote its business - backfired in Jacksonville, where Pioneer had opened an office in early 2001.
Within 18 months, Pioneer had drawn fire from Philip A. Mauffray, who was the command master chief for the Navy's southeast regional operations until his retirement last year. In June 2002, Master Chief Mauffray attended a Navy conference at which Master Chief Petty Officer Walker and Mr. McCarty were given time on the agenda to promote the company, a sponsor of the event.
"They shouldn't have been there," Master Chief Mauffray said. In his view, their role gave the impression that the Navy endorsed their business. "I made it clear that this was wrong," he said.
Mr. Freeman said he was not aware of any objections to Pioneer's role at conferences.
But the odd thing about Pioneer's entry into Jacksonville was that it did not actually plan to make any loans there and, indeed, was not licensed to do so.
Instead, Mr. Freeman said, the Jacksonville office referred loan applicants to a Pioneer office in Georgia, where Pioneer was licensed; or it steered customers to a computer kiosk linked to its Internet loan service, which is licensed in Nevada. Both states permit higher loan rates than Florida allows.
By early 2003, Captain Brown, the credit union executive, had started to see a stream of sailors coming in to refinance Pioneer loans, he said, many of them with rates of more than 30 percent. At least half of those sailors qualified for credit union loan rates of no more than 18 percent, he said.
"I called the state attorney general's office," he said.
Pioneer confirmed that it was the subject of a state inquiry in Florida and is also providing information to Georgia regulators.
Pioneer closed its Jacksonville office last March. The decision, Mr. Freeman said, was based on low levels of business and was taken months before the company learned of the state inquiry.
Few Rules, Few Solutions
After a legislative battle, payday lenders were banned from Georgia last May, largely because several military officers had testified before state legislators about how payday loans harmed their troops.
Such activism by officers is rare, however; the military has traditionally tried to address high-cost debt through financial literacy classes. But teaching 19-year-old recruits to analyze complex credit costs is "far more of a challenge" than the military realizes, said Mr. Peterson, the law professor. "If they really want to protect military consumers," he said, "the money spent on education would be far better spent on enforcement and lobbying to end these practices."
But the military does not have much to enforce. The law that puts a 6 percent cap on pre-enlistment debts does not address debts incurred after enlistment. Nor did Congress take up a bill that Representative Sam Graves, a Missouri Republican, submitted in October to cap post-enlistment rates at 36 percent.
The payday industry says military leaders should simply put unscrupulous lenders off limits. That approach is supported by the National Consumer Law Center.
But such bans have rarely if ever been used against payday lenders, Pentagon lawyers said, even when they face serious legal problems like Mr. Gill's.
That leaves the industry's voluntary code of best practices. It urges lenders to refrain from contacting a debtor's commanding officer and to stop all collection efforts when a service member leaves for combat or combat support duty.
"But enforcement is the key," said Maj. Gen. Steve Siegfried, a retired Army officer who helped draft the code. "If you don't enforce it, it's just a pretty plaque on the wall."
The industry association can do little to "get rid of jackleg outfits who prey on military people," he said. But he seemed startled when asked whether the military should disqualify lenders not complying with the code.
"We would applaud the services if they could do that," General Siegfried said. "But I don't think they will."
© 2004 New York Times