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Credit Rationing
Utah payday lenders began refusing Monday to make loans to members of the military rather than give them much lower rates mandated by a new federal law.
That new law, which took effect Monday, caps the annual interest on payday, car title or tax refund anticipation loans at 36 percent annually for members of the military and their families....
"At 36 percent annual percent rate, the total fees we could charge are $1.38 per $100 for a two-week loan. That is less than 10 cents a day," Walker said.
"Payroll advance lenders could not even meet employee payroll at that rate, let alone cover other fixed expenses and make a profit," he said.
I'm surprised that it is constitutional for the government to require firms to lower prices for certain groups. I'm not surprised that the law has unintended consequences - but perhaps the consequences were not unintended.
"The protection the regulation offers is not a wall preventing a service member from getting assistance, rather it is more like a flashing sign pointing out danger and directing the borrower to a safer way of satisfying immediate financial need," said Leslye A. Arsht, deputy undersecretary of defense for military community and family policy.
He said financial help for members of the military is available through a member's chain of command, legal assistance office or military aid society.
So the military doesn't pay you enough to pay your bills and then they reduce your borrowing options while suggesting that you can borrow more from them. Hmmm... reminds me of a company town.
More on the story here and a hat tip to Overlawyered and Bob M.
Posted by Alex Tabarrok on October 7, 2007 at 07:10 AM in Economics | Permalink
Comments
Regarding your "company town" comment right at the end, I think you might find interesting this (http://www.be.wvu.edu/divecon/econ/sobel/UnleashingCapitalism/FinalChapters/Chapter4_booklayout_final.pdf) tidbit on West Virginia's coal mining towns that relieves many of the myths about them. They didn't pay poorly, their stores didn't overcharge, etc.
It's written by Claudia Williamson, you might know her as Pete Leeson's WVU student who has followed him to GMU while she finishes her dissertation.
Posted by: Justin R at Oct 7, 2007 9:14:02 AM
Yes, military pay is low - especially for a new soldier who came in with a family - and soldiers sometimes need help, often when relocating or when an emergency comes up. I ended up at a payday advance place once myself, when a family emergency came up and I needed to get home. I could have gone to AER, but I needed to leave that night and they were closed.
The problem being addressed here is that payday lenders prey on military members. You will never see a greater concentration of them than around a base. And there are people who end up trapped - borrowing money that they can't repay, so they get another loan to make the payment and pay some other bills... At rates that can easily go over 100% a year, the borrower ends up stuck in a cycle of debt.
The law is trying to prevent this, and that's nice. But the better way to do it would be to raise military pay and offer financial classes to families. There are also certain things AER can't help with, so broadening the scope would be nice - but difficult, since the program relies to a large extent on voluntary contributions.
Posted by: Tracy at Oct 7, 2007 9:45:33 AM
Also, last I checked AER loans are zero interest. It's not like the organization makes money from them. It really is the best place for a soldier to go for help.
It's only used for more urgent situations - food, car repair, helping pay first month's rent and deposit when you move to a new base, that sort of thing. For other things, they need a bank or other source. Though I remember a couple of people being told that if they were having trouble, pay the bills so that they didn't have grocery money, then go to AER to get a food voucher for the commisary.
Posted by: Tracy at Oct 7, 2007 9:52:59 AM
Also, last I checked AER loans are zero interest. It's not like the organization makes money from them. It really is the best place for a soldier to go for help.
It's only used for more urgent situations - food, car repair, helping pay first month's rent and deposit when you move to a new base, that sort of thing. For other things, they need a bank or other source. Though I remember a couple of people being told that if they were having trouble, pay the bills so that they didn't have grocery money, then go to AER to get a food voucher for the commisary.
Posted by: Tracy at Oct 7, 2007 9:55:11 AM
I don't really see why it would be unconstitutional. Price controls for just for those serving in the military would get rational review under the equal protection clause. Since there's a pretty decent reason behind it - we know that military personnel have cheap access to credit, but we don't know about everyone else - then it would be the standard required by rational review.
That doesn't mean it's a good policy, but since it's clearly not based on invidious discrimination and there's a reasonable justification for the distinction I'm pretty sure it would pass the constitutionality test (like almost anything that gets rational review).
Posted by: Kyle at Oct 7, 2007 10:42:10 AM
There are all sorts of legal protections for members of the military. Check out the Soldiers and Sailors Civil Relief Act, or whatever it is called now. This is another.
As an attorney who represented these soldiers, I know that the Payday loans are invidious. They put extra pressure on our fighting forces and decrase readiness.
As for pay, yes it is low. I have always been of the opinion that the best job available for an 18 year old is to be a private in the military. The worst is to be a private in the military with a spouse and children.
Posted by: Allan at Oct 7, 2007 2:08:39 PM
Do I understand correctly that you think the military should pay enough for their
employees to pay their bills? Would you accompany this policy with a limit on how many bills they could run up?
I would have though you would at least would have waited to see how bad a mess the easy mortgages created before you got started on "credit snobs" again.
Posted by: spencer at Oct 7, 2007 3:23:33 PM
The Federal government has always reserved the right to provide benefits for members of the armed forces and their families. I know this because I went to high school about 5 miles from an Air Force base, and every year we had to fill out these forms about our families and it was particularly stressed that we had to check a particular box if mom or dad were in the service -- the money to teach these kids came directly from the Department of Defense rather than from the state. So yes, this is legal, what my school did was legal, VA loans are legal, and the crazy-low prices that used to exist at on-base stores are legal. Considering what are servicemen are paid and what goes on in combat, they deserve every benefit they get and then some.
Nevertheless, it would be nice if states would actually charge some of these payday loan places with usury.....
Posted by: ShortWoman at Oct 7, 2007 3:51:15 PM
To Allan and ShortWoman,
No soldier is forced to take a payday loan. There is no reason the states should regulate them
or invoke usury laws against them either.
If their pay is too low, that is another issue, but don't attack payday lenders, who provide
a useful service demanded by some people.
Posted by: Bill Stepp at Oct 7, 2007 6:57:09 PM
I see the government didn't learn any lessons from NYC rent control.
Some things never change. Those things almost wholly exist within the realm of government.
Posted by: Nate at Oct 7, 2007 8:41:26 PM
I see the government didn't learn any lessons from NYC rent control.
Some things never change. Those things almost wholly exist within the realm of government.
Posted by: Nate at Oct 7, 2007 8:41:50 PM
I see the government didn't learn any lessons from NYC rent control.
Some things never change. Those things almost wholly exist within the realm of government.
Posted by: Nate at Oct 7, 2007 8:41:57 PM
Posted by: aizheng at Oct 8, 2007 12:09:31 AM
Hi, I'm writing this from Iraq (USMC at Camp Fallujah). The last paragraph of the original post was so full of misconceptions I almost don't know where to begin.
First, military pay is not low. It was low for a long time after WWII and while the draft was going on, but since about the early 80's pay and benefits have been steadily increasing faster than inflation. Nowadays, the fast majority of service members take a substantial cut in standard of living when they get of the Military and join the civilian world (at least initially). Also, the fast majority of reservists recalled to active duty make more money while on deployment than they did in the civilian world (the benefits are much better as well)
Second, the Military doesn't give loans to anybody. The military aid societies they are talking about are really just charities. The charities are not funded by the US government. Most of the money comes from denotations from other service members.
Third, the Military's real motivation for wanting to get rid of Payday Loan places is that it interferes with the military's mission. If service members run into financial problems they will eventually be kicked out. Many service members have security clearances which are immediately yanked if their late on their bills or otherwise don’t take care of their finances properly. In fact, this is by far the most common reason why people loose their security clearances. Commanding Officers have to spend a lot of time dealing with these kinds of problems. That is the real motivation.
Having said all that, there is still plenty to criticize about the law. I have no objection to any of the criticisms. It was just amusing that you had this all-knowing snarky comment at the end, which totally outed you as a clueless Ivory Tower type. Get out in the real world for a while. It is easier than you might think. I had master’s degrees in physics and statistics when I joined the Marine Corps.
Posted by: Joseph at Oct 8, 2007 5:56:01 AM
Why should you think this unintended? Adam Smith's defense of usury (Book II, chapter 4 of Wealth of Nations) specifically argues:
"The legal rate, it is to be observed, though it ought to be somewhat above, ought not to be much above the lowest market rate. If the legal rate of interest in Great Britain, for example, was fixed so high as eight or ten per cent, the greater part of the money which was to be lent would be lent to prodigals and projectors, who alone would be willing to give this high interest."
I am inclined to think that "unintended consequences" is a mistaken idea. George Stigler argued somewhere (and I am frustrated that I cannot remember or find the reference) that the best measure of intended consequences are actual consequences. He dismissed the idea, for example, that advocates of rent control did not grasp that alternative competition for space would arise. In the same vein, it seems to me wrong to impute economic ignorance to the French students who rioted against recent efforts by the French government to ease firing restrictions because easing those rules would improve employment. A better way to analyze the problem is to look at what the firing restrictions do to increase their employability at the expense of the less skilled.
Posted by: William Sjostrom at Oct 8, 2007 7:43:53 AM
Joseph: I have to disagree. When my husband left the military (he was an E-5, just for reference), he doubled his pay, working with the same equipment in the same field. He just had a job offer for a possible management position that may nearly double it again. I have a friend who will soon be leaving the military with a substantial increase in pay, and I know others who have done the same. I've also seen several comparisons of salary between military MOS's and their civilian counterparts, done by military publications. Some make more, some make close to the same, but many make significantly less. It really depends on the career. You're very right in that military pay has increased substantially the last couple of decades, and isn't nearly as bad as it used to be. It still has a ways to go, though.
The benefits are very good - I simply can't deny that the health care for military families is very good (not so much for the members, based on our experience, but that's another rant), and the military has the best retirement benefits I've ever seen - but even after taking them into account, there's often a notable difference. I will grant that they do get the training in their field from the military rather than from college education, and got paid for it rather than paying. Still, as I said, my husband now makes double the pay, with a good benefits package. That's saying something.
You made the point much better than I did about the relief organizations not being government run, but there are loans. When my husband and I moved to one of his duty stations, there had been a paperwork problem with finance. As a result, we were short on money for getting a place to live - housing there is beyond overflowing and renting is the norm, as is the case at many bases. There is a long waiting list for on-base housing. So we went to AER and got a loan for the first month's rent and deposit, which was repaid over the course of a year, though with no interest. This is typical of how AER works in those cases. To those who need help with groceries or necessities, AER usually gives a voucher to be used at the commisary, which is not repayable. I'm pretty certain that car repair is a loan, but I'm not sure about emergency travel or other issues.
Allan, you make a very good point. For a young, single person, the military is great. But if a solder comes in with a wife and children, the starting pay is frighteningly low. I wish I still had the pay tables to demonstrate the point. Pointing out that, in some areas, low rank enlisted soldiers with families are eligible for welfare should go some way toward illustrating this.
Also, sorry about the double post earlier. :)
Posted by: Tracy at Oct 8, 2007 12:49:44 PM
It seems self-evident to me that if some military members want to take out payday loans then their pay is not very high.
It's not like payday loan places market their services to high income brackets.
Posted by: Bob Montgomery at Oct 8, 2007 3:01:00 PM
Of course tens of thousands of people leave the military every year. Some of them will get better paying jobs. But the Military has looked into this subject very thoroughly from a variety of angles. The overwhelming result of all that analysis was that military people are being paid pretty well. In most Military Occupational Specialties which have a direct civilian equivalent, the total military compensation is significantly higher than the civilian. This is not true in every field, but it is true in most. Also, there have been a lot of studies on the affects that mobilization has on reserve and National Guard members. Like I said before, most people receive a jump in pay when they mobilized. Again, some do not, but it has been well established that most do.
Posted by: Joseph at Oct 8, 2007 4:27:10 PM
I'll have to agree with Joseph. Security Clearances are a big pain in the butt.
I'm sure the pay-day loan folks aren't the type to hold off on reporting a late
payment.
Posted by: Xmas at Oct 8, 2007 5:40:12 PM
This is ridiculous. In my opinion military personnel gets paid plenty of money to cover their bill plus have a good bit of spending cash. Especially now that they are getting loads of cash in sign on bonuses. I think it is fair that the law passed so that payday lenders in Utah have the right to refuse service to military personnel at the low rates they have previously been guaranteed.
Posted by: AV at Oct 8, 2007 11:41:42 PM
Going at this from a completely economy-based point of view you have to be enraged about the fact that the government is dictating to a part of our economy what it can and cannot do. When our government, as we know it, was formed our forefathers made certain that we make America a republic NOT a monarchy, and clearly this is in vilation of that ideal. Our government is menat to have a limited power in the economy otherwise we are in danger of becoming the very monarchy we fought against in the American Revolution. In saying this, I also have to take into account the fact that I do believe our military does deserve certain breaks because of what they are doing for our coutry. However, I believe the government should offer these companies some compensation for giving these men and women what they deserve.
Posted by: Amanda F at Oct 9, 2007 3:56:50 PM
I am an Army reservist, and was denied a pay advanced today. I was not aware of such a law. No one in my unit knows about it either. I asked the check cashing teller why I was rejected and she stated because 'you can get deployed and not pay your advance back.' They also stated that my spouse can't get one either and will be obligated to sign a paper stating she does not have someone in her family serving in the Armed Forces. The paper stated that no Armed Forces who is active or will become activated within 30 days can receive pay advance. Luckily, this was not an emergency for me, or else I will be screwed. I walked out pissed and angry. It cost me $80 to drive to my weekend drill once a month just to receive a measly paycheck, I am a private. Luckily, I have a civilian job. But what pisses me off more, is why my wife would be denied and why does she have to sign a paper? Any body out there have any more info about this new law?
Posted by: Private E2 at Oct 14, 2007 4:09:43 AM
I am an Army reservist, and was denied a pay advanced today. I was not aware of such a law. No one in my unit knows about it either. I asked the check cashing teller why I was rejected and she stated because 'you can get deployed and not pay your advance back.' They also stated that my spouse can't get one either and will be obligated to sign a paper stating she does not have someone in her family serving in the Armed Forces. The paper stated that no Armed Forces who is active or will become activated within 30 days can receive pay advance. Luckily, this was not an emergency for me, or else I will be screwed. I walked out pissed and angry. It cost me $80 to drive to my weekend drill once a month just to receive a measly paycheck, I am a private. Luckily, I have a civilian job. But what pisses me off more, is why my wife would be denied and why does she have to sign a paper? Any body out there have any more info about this new law?
Posted by: Private E2 at Oct 14, 2007 4:10:46 AM
In 2006, both current presidential candidates, Barack Obama and John McCain, gave ardent support to a bill that took away a select group’s access to no fax payday loans. The bill, which went into law in October of 2007, capped the interest rates that payday loan stores could charge military personnel at 36 percent. The reasoning behind such a measure stemmed from an increasing number of American soldiers in the Army, Navy, Air Force, Coast Guard, National Guard, and other branches, discovering that loans had been taken out, in their names, without their knowing. Sometimes, they wound up being victims of identity theft. Other times, their spouses took out loans in their names without their consent, and then defaulted on them. Even worse, claims were made and accepted by the public that members of the military, who traditionally are low-income folk, also have little to no fiscal know-how. Therefore, in the interest of preventing these folks from compromising their security clearance, the government ruled in favor of the measure. Now, Obama has gone on record, declaring that he supports a measure that would impose the same interest cap for everybody, thus driving the entire industry out of the country. With the option of financial freedom at stake, think about this before casting your vote.
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Posted by: Payday Loan Advocate at Oct 18, 2008 2:21:58 AM
The basis behind the section 2007 Defense Spending Authorization Act that prohibits active members of the military from getting cash advance or payday loans came from elements within the Left who are trying to limit credit options for Americans (Yes, there are a large number of people in this country who believe in the value of the nanny state). The premise of this story written by the man-ape Lee Davidson (they share they same body type and level of intelligence) was that payday lenders were refusing to offer loans to members of the military at 36% APR. A closer look at the statute reveals that lenders, who always utilize a check to secure these loans, were no longer allowed to utilize the federal banking system to facilitate these loans. No check, no loan. It's that simple. Payday lenders do want to offer this product to all consumers because it is cheaper than paying bounced check and overdraft protection charges (If you don't believe me, look at the latest study by the FDIC on Bank overdraft charges). It is worthy of mention that there are several members of the military on this board who were willing to pay the fees associated with a payday advance and were denied because someone else believed they couldn't manage their money. (Yet, how can they manage to defend our country????) Here is another example of the government stepping in to fix a perceived problem and making matters worse.
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Posted by: Utah Payday Loans at Dec 24, 2008 3:17:45 AM
