On Payday, Many GIs Pay Back

In the Navy, security clearances are being revoked or denied for financial reasons at eight times the rate they were four years ago. The Pentagon has asked Congress to limit what payday and other lenders can charge active-duty military personnel to an annual percentage rate of 36 percent. The cap would include all fees.

The payday lending industry is fighting the cap, saying it would cut service members off from a much-needed source of credit and drive them to less regulated alternatives, such as offshore Internet lenders.

Department of Defense officials, however, feel the need to act, as payday lending storefronts have clustered near large military installations around the country. Locally, for example, there are six payday lenders outside Fort Belvoir in Fairfax County.

What attracts payday lenders to bases, the Defense Department report said, are thousands of young, financially inexperienced service members who have bank accounts and steady jobs but little savings and, often, flawed credit.

"They use the payday lenders because they're ever-present," said Sen. James M. Talent (R-Mo.), who is pushing for the 36 percent cap. "You can't go 100 yards off a base without running into one."

The Senate Banking Committee will hold a hearing Thursday on the Pentagon report's findings.

Under the proposed limit, the fee on a $100 payday advance would be $1.38, or less than 10 cents per day. That's not enough for a payday lender to pay its costs for making the loans, according to Lyndsey Medsker, a spokeswoman for the Community Financial Services Association of America, a national trade association representing payday lenders. A 2005 study by the Federal Deposit Insurance Corp. reported that the cost to originate and service a payday advance of $245 is about $32.

The cap on loans to the military could have worse consequences for consumers, Medsker said.

"Prohibiting a service or eliminating one short-term credit option is not solving the problem that people still need access to short-term credit," she said.

Growth Industry

In the past six years, as banks have retreated from small loans, the number of payday lenders nationwide has more than doubled, to 22,000, according to estimates by investment banking firm Stephens Inc. The industry is dominated by about a dozen companies, such as Advance America, QC Holdings Inc. and Ace Cash Express Inc. Several of the companies are publicly traded.

Key to the industry's growth have been laws in 37 states and the District that allow them to operate under a variety of restrictions. The District, which passed such legislation in 1998, has about 30 payday lenders. The city caps loans at $1,000 and limits fees to $5 to $20, depending on the size of the loan.

Virginia limits fees to $15 for each $100 loaned, and borrowers are allowed to prepay loans without a penalty. The volume of short-term, high-interest loans made in Virginia last year topped $1 billion, according to state banking regulators.