Copyright (c) 2005 Ohio State Law Journal
Ohio State Law Journal

2005

66 Ohio St. L.J. 653

LENGTH: 59423 words

ARTICLE: Predatory Lending and the Military: The Law and Geography of "Payday" Loans in Military Towns

NAME: Steven M. Graves* and Christopher L. Peterson**

BIO:

* Assistant Professor of Geography, California State University, Northridge. The author gratefully acknowledges generous financial assistance from the College of Social and Behavioral Sciences at California State University, Northridge.


** Assistant Professor of Law, University of Florida, Frederic G. Levin College of Law. The author wishes to thank the following for helpful conversations, comments, encouragement, research assistance, and suggestions: Reed Clary, Lynn Drysdale, Mark Fenster, Diana Henriques, Lyrissa Lidsky, Diane Mazur, Tera Peterson, Buddy Schulz, Sarah Stoddard, Michael Wolf, and Barbara Woodhouse. Special thanks to Blake Delaney for exceptionally thorough and helpful research assistance.

SUMMARY:
... A heated national debate has developed over whether one type of high-cost predatory lender, commonly known as "payday lenders," target financially vulnerable military families and whether the law protects them from such predation. ... Consequently, the SCRA's only threat to the payday loan industry would arise if a service member entered into a payday loan transaction and then, and only then, was called up to active duty. ... Accordingly, mapping payday lender locations can reliably determine the extent to which payday lenders target military personnel. ... On paper, every loan is "made" by the bank, but the name on the door is that of the payday loan company, and the only person the borrower ever sees is an employee of the payday lender. ... In October 2002, Salazar again initiated disciplinary proceedings, this time against Americash, a Knoxville, Tennessee-based payday lender operating ten payday loan stores in Denver and Colorado Springs. ... While lenders are not supposed to issue a payday loan for the purpose of allowing the borrower to pay off an existing payday loan from the same lender, the statute does not appear to address paying off one payday lender with the proceeds of a loan from a different lender. ... A consumer advocacy organization reported that after the payday loan law sunset, some smaller payday lending companies sold out to larger chains while others reverted to their original check cashing business. ...

HIGHLIGHT: A heated national debate has developed over whether one type of high-cost predatory lender, commonly known as "payday lenders," target financially vulnerable military families and whether the law protects them from such predation. Writing within the relatively new interdisciplinary "law and geography" movement, this Article provides geographic evidence that payday lenders do aggressively target American military personnel, irrespective of most forms of legal regulation.



This Article first provides a comprehensive introduction to payday lending business practices and to the financial vulnerability of military personnel. Next, this Article presents empirical research gathered from an examination of 20 states, 1516 counties, 13,253 ZIP codes, nearly 15,000 payday lenders, and 109 military bases. High concentrations of payday lending businesses in counties, ZIP codes, and neighborhoods in close proximity to military bases were found. Observations were controlled by comparing the density of payday lender locations to bank locations.



Each of the 20 states studied had a different legal and regulatory strategy for addressing payday lending. However, the only regulatory strategy which prevented payday lenders from targeting military personnel was the aggressive and consistent enforcement of civil and criminal usury law. Going beyond the debate over predatory lending to military personnel, this research provides a realist check on pure legal reasoning and unfounded faith in current consumer protection rules.



TEXT:
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I. Introduction



"Support the troops" has become a national rallying cry. Because we live in a complex and dangerous world, we as a society rely on the military to protect us. President George W. Bush recently stated that "Americans live in freedom because of our veterans' courage, dedication to duty, and love of country." 1 This sentiment speaks to the fundamental debt of honor and respect we owe the women and men who make great sacrifices, sometimes the ultimate sacrifice, to protect us. 2 In satisfying this debt, the United States expends vast resources in caring for current and former military personnel and their families. 3 The [*656] Department of Defense maintains a comprehensive system of social services aiming to meet every need of every member of every armed service family. 4



Nevertheless, profound questions remain about the extent and nature of our support of military personnel. In recent years, scholars have asked compelling questions about the quality of life and overall well-being of military families. 5 [*657] Recent events, such as soldier discontent over unarmored vehicles in Iraq, have heightened these concerns. 6 Similarly, many have pointed to unfairness over the military's use of stop-loss orders to impose extended tours of duty. 7 Closer to home, recent studies have increasingly found many members of the armed forces suffer a long-term earnings penalty later in life. 8 Several commentators have suggested that military personnel may be targeted for a variety of consumer scams, such as over-priced insurance and sham investments. 9



Similarly, a heated national debate has developed over whether abusive high-cost lenders are targeting financially vulnerable military families. 10 Consumer advocates and the media have accused one group of lenders, commonly known [*658] as payday lenders, of causing particular trouble for enlisted military personnel. 11 For instance, a front page New York Times article discussed a growing chorus of complaints that payday lenders charge exorbitant and unfair prices to unsuspecting and desperate military borrowers. 12 These critics have pointed to anecdotal evidence suggesting that payday lenders have identified the armed forces as a profitable market to exploit, leading to hardship on military families. 13 Some military officers have agreed, going so far as to complain that payday lenders are eroding military readiness by undermining troop morale. 14 These officers believe that payday lenders sabotage all of the expensive programs and services designed to preserve the quality of life for members of the armed forces. 15 For their part, payday lenders say they are helping their debtors out of short-term cash problems at an affordable price. 16 Payday lenders emphasize that [*659] their customers borrow voluntarily and they accuse their critics of paternalism. 17 Still, fearing a public relations nightmare, payday lenders and their trade associations have vociferously denied targeting military personnel. 18



This Article attempts to ascertain whether payday lenders do in fact target members of the armed services. Employing analytical tools of the emerging interdisciplinary law and geography movement, this study compares the payday lender storefront locations in military towns across differing state legal regimes. Moreover, this Article describes and evaluates the different legal strategies that the federal and state governments have used to curtail perceived social problems associated with payday lending. In particular, we examine whether differing state legal approaches may have affected the extent to which payday lenders target military personnel. Our study systematically surveys 20 states, 1516 counties, 13,253 ZIP codes, nearly 15,000 payday lenders, and 109 military bases. We conclude that (1) there is irrefutable geographic evidence demonstrating that payday lenders are actively and aggressively targeting U.S. military personnel, and (2) all state legal strategies except for aggressive criminal prosecution of usury laws have been ineffective in deterring this commercial behavior. Our interdisciplinary use of law and geography should serve as a realist check on pure legal reasoning and unfounded faith in the efficacy of our existing legal strategies.



Part II of our Article describes the payday lending industry, frames the background of financial vulnerability facing past, current, and future military personnel, and introduces the emerging debate over payday lending to military personnel. Part III introduces leading law and geography theory and summarizes our empirical methodology. Part IV juxtaposes our empirical description of payday lender location strategies near U.S. military bases with descriptions of the payday lending legal environment in force at each location. Part V analyzes the results of this study, ultimately drawing descriptive and prescriptive conclusions for policy makers, including state and federal law makers, as well as military leaders.

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II. Background



A. Payday Lending



1. What Are Payday Loans?



Payday loans are high interest rate, rapidly compounding loans meant to tide over cash-short borrowers until their next paycheck. 19 In a typical transaction, a customer might borrow $ 200 by writing a check drawn on her personal checking account and made out to the lender for $ 235. 20 Typically, the borrower "post-dates" the check by writing a date one or two weeks in the future. 21 This date is the day that the parties agree the borrower will repay the loan and interest. Before making the loan, payday lenders generally verify the debtor's identity by asking for documents or identification such as a driver's license, recent pay stubs, bank statements, car registration, or telephone bills. 22 Many lenders telephone the borrower's human resource manager or boss to verify the borrower's employment. 23 Virtually all lenders require the names, addresses, and telephone numbers of close family and friends in the event that the borrower skips town. 24 Payday lenders usually decide whether to issue a loan on the spot without obtaining a credit report. 25 Both parties are aware that the borrower's checking account does not have sufficient funds to cover the check when the check is signed. 26 The assumption is that the borrower will have deposited sufficient funds in her checking account to cover the check before the due date of the loan. After the paperwork is complete, the debtor walks away with $ 200 in cash or a check drawn on the lender's account. When the two weeks are up, the debtor can [*661] redeem the check with cash or a money order, permit the check to be deposited, or attempt to renew the loan by paying another fee. 27 If the borrower cannot pay off the loan, the obligation continues to accrue $ 35 in interest every two weeks. Although the initial $ 35 fee represents only 17.5% of the loan amount, the annual percentage rate of the transaction is around 455%.



A 455% interest rate is by no means uncommon. 28 Studies by state governments, scholars, and consumer advocates generally indicate that average payday loan rates range from 364% to 550%. A consumer advocate coalition study surveying lenders in nineteen states and the District of Columbia found an average interest rate of 474%. 29 Other regional data tend to roughly confirm this figure. For instance, the Indiana Department of Financial Institutions survey found that the average Indiana payday loan interest rate was 498.75%. 30 North Carolina consumers purchase about 63% of their payday loans at annual interest rates between 460.08% and 805.15%. 31 A recent report on Oklahoma payday lenders may suggest a slightly lower average APR of around 364.47% in that state. 32 A report on payday lenders in Salt Lake City showed an average rate of 528.49%. 33 Still, some lenders charge rates far in excess of these averages. For example, Indiana regulators found one lender offering payday loans at an interest rate of 7600%. 34 Moreover, these interest rates do not include common contingent charges, including late fees and bounced check fees, which can cost nearly as much, or even more, interest as the loan itself.



Payday lenders argue that quoting an annual percentage rate for a two-week [*662] loan is misleading and unhelpful. 35 Instead, payday lenders prefer to quote loan prices as a percent of the principal borrowed. 36 For instance, if the consumer borrows $ 300 for two weeks in exchange for a fee of $ 52.50, lenders will often describe this as a "17.5%" loan. Lenders suggest payday loans compare favorably to bounced check fees, which average around $ 21. 37 Critics of payday lending retort that a bounced check fee is a one-time charge that does not continue to compound again and again. 38 For loans, annualized interest rates are the uniform metric which all mainstream creditors use to compare prices. Home mortgages, student loans, and automobile loans are all disclosed and regulated with an annual percentage rate terminology. Even other short-term lenders, such as credit card issuers, use annual percentage rates. Consumers wishing to compare the price of available credit options tend to be confused and surprised by different price quoting conventions for different types of credit. To those with limited financial literacy, or even to casual observers, a cash advance or purchase on a 17.5% APR credit card may be indistinguishable from a payday loan with 17.5%-of- principal fee. Most payday loan borrowers will be surprised to know that the interest rate of the latter loan is about 26 times more expensive than that of the former. Not surprisingly, one industry-sponsored telephone survey found that 72% of payday loan borrowers said they did not know the annual percentage rate of their most recent loan. 39 More than half of the small minority who claimed to know their annual percentage rate incorrectly believed that their rate was far lower than it actually was. 40



Annual percentage rate terminology is also appropriate for payday loans because these loans often compound for durations coming close to or exceeding a year. For any given loan, many payday loan borrowers simply lack the funds to pay on the due date and are accordingly forced to roll over the loan. 41 [*663] Compelling evidence suggests that a substantial portion of the payday loan market is made up of extensions of previous loans, sometimes for protracted durations. North Carolina regulators found that about 87% of borrowers would roll over any given loan at least one time with any given lender. 42 Not counting debtors who borrowed from multiple locations, nearly 40% of North Carolina borrowers renewed their payday loans more than ten times. 43 The Indiana Department of Financial Institutions study found that 77% of all payday transactions were extensions of previous loans. 44 In Oklahoma, the average payday loan customer took out 4.3 payday loans during a four-month period from August 2004 to November 2004-just over one per month. 45 Consumer advocates have found that the average payday loan customer borrows 10.19 payday loans per year. 46 In Iowa, the Division of Banking found an average of 12.5 loans per year per customer. 47 An industry-sponsored study found that 30% of borrowers had seven or more loans in a year, and that about 75% of borrowers rolled over their loan at least one time. 48 Regulators in Illinois found payday loan borrowers "who were borrowing continuously for over a year on their original loan." 49 An empirical study by Professor Creola Johnson found that payday lenders repeatedly roll over payday loans even in states with statutes prohibiting this practice. 50 Moreover, there are frequent reports of loans outstanding for one, two, or even three years. 51 Collectively these statistics have led consumer advocates to argue that payday loans trap borrowers into a cycle of "chain debt." 52

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Payday lenders argue that the high prices and long durations of their loans are justified by the high administrative costs of doing business and by the high default rates. 53 Scholars have countered that high payday loan prices actually "mutually reinforc[e]" loan losses because the high prices induce default, which in turn raises prices. 54 Moreover, even if payday loan loss rates justify higher pricing, the payday lending business has still proven wildly profitable. A Federal Deposit Insurance Agency official wrote that, despite credit and reputational risks, "higher pricing on payday loans promises higher revenues and wider margins for lenders." 55 One economics professor has estimated that payday lending operations "earn ten to twenty times higher 'return on equity' than traditional banks." 56 Similarly, after the Tennessee Legislature took steps to legalize payday lending, the Tennessee Department of Financial Institutions conducted a follow-up survey, finding that licensed payday lenders "earned over [30%] return on investment in the first nine months of legal operation." 57 But perhaps most interesting is that payday lender profits come disproportionately from high- frequency borrowers. Peter Skillern's study of the North Carolina market found that 85% of payday lender revenue in that state comes from borrowers receiving five or more payday loans in a year. 58



Critics of the payday lenders have also complained of a culture of disregard for the rule of law in the industry. For example, in 713 payday lender inspections conducted over a three-year period, North Carolina banking officials found 8911 violations of simple state consumer-protection rules. 59 Payday lenders in many states refuse to obtain licenses required by state law. 60 Over a thousand payday lenders in Texas openly ignore state interest rate limitations. 61 Creola Johnson's [*665] study of Ohio payday lenders found that payday lenders in that state systematically provided false and misleading information on loan contract terms, illegally advertised the cost of credit without using annual percentage rate terminology, and allowed "consumers to roll over payday loans in violation of state law." 62 And there are widespread reports that many payday lenders use false but intimidating threats of criminal prosecution under "bad check" laws. 63 Needless to say, criminal prosecution has not been a remedy available to traditional creditors since debtors prisons were outlawed after the Civil War. 64



2. Payday Lending in History: Ancient Lineage and Recent Resurgence



Payday loans are only one recent incarnation of a consumer financial product dating back to our earliest recorded civilizations. While it is true that the use of a negotiable instrument (or an agreement to allow an electronic debit) as a form of collateral is a relatively recent innovation amongst consumer borrowers, pledging to pay one's earnings in the immediate future in exchange for money today is ancient. High-cost loans with contractual terms similar to payday loans have existed for thousands of years. Even before governments learned to coin currency, records of ancient Mesopotamian and Mediterranean civilizations amply document high-cost consumer loans payable in grain, animals, or metal. 65 Just as today's debtors collect wages and borrow money using checks, ancient peasants, who earned a living raising grains and animals, repaid their high-cost debts in kind. 66 While today's borrowers wonder whether they will have sufficient funds in their accounts to cover a check post-dated two weeks in advance, ancient debtors "dreaded 'the end of the moon'" when their high-cost loans came due. 67 And, like today's high-cost debtors, ancient borrowers signed short-term loans intending to repay quickly, but in fact found themselves committed to loans that "often compounded over long periods." 68 "Because [*666] [high-cost] creditors lent to those in desperate need of food or shelter, the relative bargaining position of debtors often placed them at a significant disadvantage." 69 One commentator explained the earliest credit markets thus: "Human nature being what it is . . . [t]he rich extracted hard bargains and grew richer; the poor fell into perpetual debt and forfeited their meager possessions." 70 It is an open question whether this comment is less applicable today.



There is also significant historical evidence dating back thousands of years of predatory loans harming military personnel and their families. While a comprehensive discussion of this history is beyond the scope of our Article, a few short examples are illustrative. First, the Roman Republic was forced to address abusive high-cost lending to military personnel prior to its rise to a preeminent power in the ancient Mediterranean. 71 In the fifth century B.C.E., Romans were only one of several ethnic groups present in Italy, and they were still far away from assuming their later historical importance. 72 In 494 B.C.E., a violent civil revolt took place. 73 A large number of poor plebeians withdrew from the city and gathered on a hill overlooking the Tiber River, where they preceded to elect their own shadow legislature, officials, and tribunes, essentially seceding from the Roman Republic. 74 The revolt, called the First Secession, threatened to rip apart the emerging Roman nation. 75 Interestingly, "[b]y all accounts the principal cause of the First Secession was a debt crisis." 76



Many historians, both modern and ancient, have focused on one story which may have lit the fire. 77 Apparently, a war veteran's farm was destroyed during a battle with a rival tribe. 78 The loss of his farm, combined with government tax demands, forced the veteran to borrow money at dangerously high rates. 79 When [*667] he was unable to pay, his creditor imprisoned and tortured him. 80 Eventually, the veteran appeared in the city forum where those who heard his story were so enraged they took to the streets rioting. 81 The first major codification of Roman law, called the Twelve Tables, was in part a response to the debt crisis of the First Secession. 82 The Twelve Tables included Rome's first usury law and some basic provisions to enforce it. 83 Eventually settling on a 12% percent interest rate cap, Rome rose to power under a legal regime which clearly outlawed today's payday loans. 84 This 12% interest rate cap remained the legal limit for centuries and was eventually adopted by both the later Empire and the Byzantine Empire in Constantinople. 85



Predatory lending to military personnel has not been limited to Western cultures. For example, historical sources link the decline of the Ming dynasty in China to debt-related peasant riots sparked by predatory lending to soldiers. During the Ming dynasty, China was home to a large and thriving industry of creditors that loaned money to the working poor at high interest rates. Records suggest that in 1587, over 20,000 pawn shops operated across China. 86 Similarly, businesses owned by wealthy families with links to imperial authority often took high-priced mortgages on the homes and land of poor farmers. 87 When subsistence farmers fell behind on payments, creditors relied on local "roughnecks" to collect. 88 In the late Ming dynasty, these contracts dispossessed a substantial portion of the population and helped cement a wide gap between [*668] the rich and poor. 89



Some historians believe these financial conditions weakened China, inviting invasion by hostile neighbors. The Ming dynasty ended after a series of peasant rebellions paved the way for Manchurian invaders from the North. 90 An ancient Chinese historian attributes predatory loans to Chinese military personnel as the trigger of these riots-bearing a remarkable similarity to Roman history. Apparently the incident involved a predatory lender who named himself "Ch'ien," which is the Chinese word for money. 91 Surprising soldiers with deceptively high rates, Ch'ien demanded repayment far in excess of the principal originally borrowed. 92 This lender, and presumably others, managed to enforce his loans by sharing the profits with officials, including a garrison commander. 93 Eventually, soldiers became so outraged that they mutinied and organized local peasants suffering from crushing poverty to join them. 94 Unlike Rome, which successfully reformed its laws, the Ming dynasty was too slow to react and eventually faltered.



Historians have recorded similar incidents in American history as well. In the nineteenth century, as the United States began expanding westward, military personnel were often posted in remote frontier garrisons. 95 Similarly, during the Civil War, Union soldiers faced long and disrupted supply lines. 96 These conditions meant that soldiers often had insufficient food and clothing and also received their wages at irregular intervals. 97 A particular type of merchant followed Union Army units, setting up operations on the outskirts of each camp or garrison. 98 Sometimes called "sutlers," these merchants came to specialize in [*669] providing goods and services to struggling soldiers. 99 Many sutlers lent cash, but they also supplied food, clothing, boots, gloves, medication, tobacco, and alcohol on credit. 100 Some sutlers refused to advance funds or provide change in currency, instead giving cardboard tickets redeemable exclusively at the sutler's own store. 101 This forced hungry and cold soldiers to trade away the liquidity of their wages. With their wages converted into sutler's tickets, soldiers could not force price competition with other sutlers, nor could they shop with traditional merchants when the opportunity arose. 102 While sutlers did take risks, many got rich by charging outrageous prices and interest rates to soldiers who made steady wages and had few options. 103 Some sutlers gave "presents" to officers who then looked the other way. 104



Recognizing its own limitations in meeting soldiers' needs, the Army tolerated sutlers, allowing up to one sutler for each regiment. 105 Rank and file soldiers, however, often despised their creditors; they "did not appreciate the 'risks' taken by men who were getting rich at their disadvantage, who did not conform to military rules, and who were exposed to enemy fire only by accident, and they accused the sutlers of price-gouging and profiteering." 106 While the practices associated with Civil War era sutlers varied from unit to unit, their situation repeatedly led enraged soldiers to rise up and rampage through their own camps. 107 Many units took matters into their own hands, chasing their sutler lenders out of camp with all-too-real death threats. 108



The immediate commercial precursor to today's payday lenders developed in large eastern U.S. cities during this same period of time: the mid-nineteenth century. A type of lender commonly referred to as a "salary lender" emerged by serving a clientele typically composed of employees of large government and industrial institutions, including "civil servants, railroad workers, streetcar [*670] motormen, and clerks in firms such as insurance companies." 109 Such workers, often recent immigrants or former agricultural laborers, formed the foundation of the emerging lower middle class of urban American society. 110 These people usually borrowed to meet unexpected needs, such as family illness or moving expenses. 111 Nevertheless, they held steady jobs and had family obligations which prevented them from simply skipping town. 112 Salary lenders targeted these workers because their steady supply of disposable income made them likely to repay, and their frequent minor income shocks made them likely to borrow. 113



It was these salary lenders whom working class people in the eastern United States first came to describe as "loan sharks." 114 Although the term was new, the contractual terms and collection tactics of the lenders were reminiscent of the high-cost wage-based lending common in previous centuries. In a typical transaction, a debtor would borrow five dollars and repay six within the next week or so. 115 Very similar to today's payday loans, the charge of 20% of the loan principal amounted to around 520% per annum, assuming a two-week maturation period. 116 The charge of one or two dollars itself seemed fairly innocuous for any one given week. But, when a debtor lost a job, was not paid for his work, became ill, had a family member become ill, or was prevented from paying for any other reason, the simple transaction rapidly swelled into a sizeable drain on an already strained budget. Thus, late nineteenth and early twentieth century salary loans often ended up compounding over lengthy periods of time. 117 Newspapers of the day frequently gave anecdotal accounts of debtors trapped by their salary loans, such as "the employee of a New York publishing house who supported a large family on a salary of $ 22.50 per week and had been paying $ 5 per week to a salary lender for several years, until he had paid more [*671] than ten times the original loan." 118 Similarly, a Chicago consumer borrowed $ 15, but "ten years later [he] had repaid $ 2,153 and still owed the original $ 15." 119 More compelling were the records of one salary lender in New York City, which showed that out of approximately 400 debtors, 163 had been making payments on the loans for over two years. 120



Late nineteenth and early twentieth century salary lenders charged interest rates far in excess of state usury laws. A far cry from contemporary American attitudes about credit, early American culture strongly condemned borrowing money for personal purposes. Early colonial leaders, including the founding fathers of the U.S. Constitution, believed borrowing was a moral vice. 121 Accordingly, these leaders adopted interest rate caps, called general usury laws, which limited annual interest rates to around six percent. 122 With a few exceptions, these interest rate caps remained intact into the twentieth century. 123 Nevertheless, salary lenders in eastern U.S. cities managed to conduct business through a variety of thinly veiled disguises and sham transactions. 124 For instance, many lenders justified ignoring the interest rate cap by phrasing the contract as a purchase or assignment of future wages, rather than as a loan. 125 Other lenders would manipulate the legal "time-price doctrine" to avoid interest rate caps. 126 Under English law, when a buyer purchased a physical good over time through installments, it was not considered a loan for purposes of a statutory interest rate cap. 127 This led some lenders to avoid interest rate caps by, for example, requiring the debtor to "purchase" a worthless oil painting at the time the loan contract was signed. 128 The debtor would owe the same amount of [*672] money, and could immediately throw the painting away, but the transaction would be at least superficially legal. 129



Beginning in the 1910s and 1920s, a widespread movement aimed at cracking down on the salary lending industry, now often called the "loan shark problem," developed. Nonprofit organizations, often backed by the fortunes of deceased captains of industry, attacked salary lenders through legal advocacy and by providing low-cost charitable alternatives to salary loans. 130 The media began exposing and editorializing against salary lenders, creating pressure for reform. Appellate courts began handing down stinging rebukes of salary lenders and developing common law language exhorting trial judges to ignore salary lender subterfuges that concealed illegal interest rates. 131 State legislatures began amending their general usury laws to raise interest rate caps in order to attract legal private capital to the markets for consumer loans. 132 These "special usury laws," commonly called small loan laws, allowed lenders-who would agree to licensing, bookkeeping, security interest, and collection practice rules-to lend small amounts at between 36% and 42% per year. 133 The hope was that, with these new interest rate caps, honest, respectable private lenders would flow into the market for costly consumer loans, creating healthy competition and driving the salary lenders out of business. 134 And finally, large industry accepted these reforms because they themselves wanted to begin lending to consumers at moderate prices which nevertheless exceeded the low colonial-era general usury laws. Collectively, these forces significantly curtailed salary lending throughout the United States for most of the twentieth century.



Economic forces and legal changes in the 1970s and 1980s began to lay a foundation for a resurgence in salary lending, however. Unprecedented inflation forced the Federal Reserve Board to adopt monetary policy resulting in high long-term commercial interest rates. The high cost of funds made it difficult for banks, credit unions, and other mainstream lenders to loan money within state interest rate caps. It became fashionable for neoclassical economists and legal and economics scholars to goad leaders into abandoning usury laws. State legislatures were increasingly making a habit of granting special permission to lenders to charge higher and higher interest rates. Retail installment stores, pawnshops, and rent-to-own furnishing stores all successfully lobbied for special treatment. Many state legislatures also raised, or even eliminated, their interest [*673] rate caps. 135 Moreover, the Supreme Court's decision in Marquette National Bank v. First of Omaha Service Corp., 136 which is discussed in greater detail in the next Part, encouraged these trends.



At the beginning of the 1990s, the best available estimate suggests that fewer than 200 business locations nationwide offered payday loans-loans that were clearly a throw-back to the old salary lending business mostly stamped out 50 or so years before. 137 Businesses offering payday loans at this point were usually focused primarily on cashing paychecks for consumers who lacked traditional banking services. These businesses found that they could attract larger clientele and make staggering profits by agreeing to "cash" consumers' post-dated personal checks. If a consumer needed a loan, she could write a check for funds she did not actually have in her checking account. 138 If the "check casher" agreed to wait two weeks before attempting to tender the check, then the consumer would have time to make some more money, deposit additional funds in her checking account, and thus cover the check by the agreed-upon date. 139 The term "payday loan" derived from this practice because often the date consumers wrote on their checks corresponded to their next payday. When sued by consumers alleging usury violations, these check cashers maintained that they were not lending money, but were simply cashing a check. 140



Current payday lenders make similar arguments. Some payday lenders claim to be "leasing" money to the consumer, rather than making a loan. 141 In these sale-leaseback transactions, the consumer "sells" a household appliance to the business, which then "leases" it back for a fee until the consumer can repurchase it. "The appliance, however, is never actually delivered to the lender. Instead, the lender gives the consumer cash and takes only a post-dated check from the consumer as security." 142 Other payday lenders disguise their loans as "catalog sales." 143 Similar to the worthless oil painting dodge of a century ago, these lenders require that the consumer buy certificates, which they can redeem for merchandise from a catalog. The consumer writes a check and in return obtains cash and some certificates redeemable for merchandise from a catalog on [*674] display. 144 While the borrower may never redeem the catalog certificates, the real point of the transaction is that the lender waits about two weeks before tendering the borrower's check. Oblivious to the recurring patterns from disguised salary loans of a century earlier, some courts have gone along with these charades. 145 The Federal Reserve Board, however, has been relatively quick to recognize the fees associated with these transactions for what they are: a finance charge subject to disclosure as interest under the Truth in Lending Act. 146



Still, with state courts and regulatory authorities slow to act, and with enormous profits to be had, the payday lending business exploded in the late 1990s. In North Carolina, payday lending outlets roughly quadrupled in four years, growing from 307 in 1997 to 1204 in 2000. 147 Payday lending outlets quintupled in Salt Lake City between 1994 and 2000. 148 Wyoming payday lenders almost tripled between 1996 and 1997. 149 Iowa's payday lenders increased from eight to 64 in two years. 150 In states where payday lending was once illegal under state law, bills purporting to regulate the industry have in fact legitimized it, leading to astonishing growth nearly overnight. For instance, after Mississippi began regulating payday lenders in 1998, the number of outlets in that state quickly tripled. 151 Some lenders, such as QC Holdings, Inc., have proven so profitable that they have filed with the SEC and are now publicly traded corporations. 152 As of 2001, over 12,000 payday loan outlets were [*675] operating nationwide, with the industry continuing to expand rapidly. 153 Attempting to put this fundamental shift in the financial services industry into perspective, the U.S. Comptroller of the Currency famously remarked that "California alone has more payday loan officesCnearly 2,000Cthan it does McDonalds and Burger Kings." 154



B. Financial Vulnerability of Military Personnel



For those who care about the well-being of American military service members, the recent resurgence of an industry which first gave rise to the term "loan shark" has troubling overtones. A large and well-documented body of literature has explored the precarious financial position of members of the U.S. military. We believe this literature suggests that military service members may have several characteristics which make them especially vulnerable to high-cost indebtedness. From this literature, we have distilled four factors which tend to suggest that military personnel may be uniquely viable targets for predatory lending in general, and payday loans in particular: (1) demographic characteristics which predispose military service members toward high-cost indebtedness; (2) the form, amount, and distribution of military compensation; (3) dislocation faced by military service members and their families; and (4) military cultural considerations.



1. Demographic Predisposition



Military service members tend to have demographic characteristics associated with personal indebtedness problems. While there is considerable variation among different service branches, the great majority of military service members are young enlisted personnel. Junior enlisted personnel make up about 75% of the military. 155 In fact, the Department of Defense is "the nation's largest employer of American youth." 156 Unlike their civilian peers, a relatively large proportion of these young people are recently married and have young [*676] children. 157 Some commentators have suggested that high health care costs and the growing scarcity of health insurance have forced young parents to turn disproportionately to the military because of its relatively generous government- provided health care system. 158 A small but growing minority of these families are single-parent households. 159



Historically, young enlisted military personnel have hailed from primarily economically disadvantaged backgrounds. 160 Moreover, vulnerable groups have sought out the armed services as a means of moving along both formal and informal paths of citizenship and social privilege. 161 For centuries, minorities and recent immigrants have seen service in the armed forces as a way to achieve social legitimacy and legal rights. 162 Especially during major conflicts, such as the Civil War and both World Wars, authorities have waived normal citizenship requirements for alien military personnel. 163 Many refugees and temporary workers still turn to the military as a way of speeding up immigration procedures. 164 Currently, a small but symbolically important group of about 32,000 non-citizens is serving in the U.S. military. 165 More significant demographically is the disproportionate representation of African Americans in the military, who make up about 13% of the American civilian population, but about 20% of enlisted personnel. 166

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Enlisted military personnel also have had historically limited educational backgrounds. 167 For instance, at the end of the 1970s, almost half of military enlistees lacked a high school diploma, and only 2.2% had any college experience. 168 Because in recent years military recruiters have focused on applicants with high school degrees, currently about ninety-nine percent of enlistees are high school graduates. 169 Nevertheless, almost half of enlisted personnel list the primary motivation for joining the military as the ability to receive future assistance in obtaining an education that they have not yet acquired. 170



Consumer finance research suggests these demographic characteristics of the nation's enlisted military personnel are serious risk factors for personal debt problems. Young people often lack financial experience and tend to borrow with less regard for the long-term consequences. 171 Young families have extreme financial pressure from child-rearing expenses, making debt a tempting option. 172 The emerging class of single-parent military personnel may be especially vulnerable. 173 Empirical evidence consistently finds an association between single-parent families and a variety of social, health, and financial impairments. 174 Single-income families are less able to overcome income shocks and sudden expenses, making them more likely to borrow and less likely to repay successfully. A recent study of bankrupt families found that "[h]ouseholds without a male present were nearly twice as likely to file for bankruptcy giving a medical reason or identifying a substantial medical debt as households with a male present." 175 Similarly, because enlisted service members tend to come from financially vulnerable backgrounds, they may have fewer familial resources to [*678] draw on in financial emergencies, in turn forcing them to creditors. Many recent immigrants and their families have tenuous personal finances, face language barriers, and hail from countries relatively unaccustomed to credit. 176 Several commentators have argued persuasively that these characteristics leave recent immigrants vulnerable to targeting by predatory lenders. 177 A large literature suggests that African Americans and other ethnic minorities have faced exclusion from inexpensive creditors and targeting by predatory lenders. 178 Finally, many commentators have argued that individuals with limited education and financial experience have greater difficulty shopping for lower priced loans, leaving them at risk for marketing by high-cost and predatory lenders. 179 All of these factors suggest troubling implications for military service members.

[*679]

2. The Military Compensation System



The form, amount, and distribution of military compensation may also place military personnel at risk for high-cost debt problems. The most important aspect of military compensation is the lack of it. Junior enlisted military personnel are low- wage entry-level workers. A typical Army private first class makes $ 16,884 per year. 180 Like all low-wage workers, military personnel tend to live month-to-month, often struggling to pay their bills. Military surveys reveal that nearly one-third of enlisted service members self-report moderate to severe difficulty in paying their bills. 181 Sudden unexpected expenses such as car trouble or legal problems, as well as poor personal financial choices, can all pitch low-wage workers into financial hardship caused by debt. For junior enlisted military personnel, these cash shortages do not always resolve themselves over time because these enlistees tend to see relatively little growth in their monetary compensation over the course of their careers. 182



Furthermore, military compensation comes with high opportunity costs from long and irregular hours. As Professors Bowen and Orthner observed:



Service in the armed forces involves more than an occupation choice; it is the selection of a life style that permeates almost every aspect of a person's life. Few civilian occupations require the high level of commitment and dedication from their employees that the military services require. Even fewer ask their employees, much less members of the employees' families, to make such a range of personal and family sacrifices to accommodate the work mission, including long work hours, high-stress assignments, required relocations, frequent family separations and reunions, remote tours of service, long-term separations from extended family and friends, residence in foreign countries, and frequent subservience of family needs to mission responsibilities. 183



At the most practical level, when military personnel fall into financial difficulty, they do not have the option of taking a second job to cover their expenses, which is an important route to overcome financial hardship for civilians. 184 Nor does the military pay overtime to its employees despite requiring [*680] long hours. 185



The predictability of monthly income for junior enlisted personnel also may place them at risk for debt problems. On the one hand, prospective creditors can be relatively certain that military personnel are going to be paid. Unlike comparable private sector workers, such as service employees, construction workers, and small business entrepreneurs, junior enlisted military personnel are unlikely to be laid off, fired, or have their businesses fail. On the other hand, junior enlisted military personnel often have great difficulty predicting exactly what their monthly income will be in any given month. The Government Accountability Office has found that military families chronically suffer from delays and mistakes in the distribution of their wages. But even when wages are paid correctly, enlisted family income varies significantly with the deployment schedule of the unit. 186 For example, many military families receive a subsistence allowance intended to feed the service member, and many rely on this allowance to feed the entire family and to pay bills. 187 Yet when the service member is unexpectedly deployed or called into the field, this separate allowance is no longer provided, potentially creating an unexpected income shock. 188 The simultaneous likelihood that military members will eventually be paid, combined with unpredictable changes in compensation, make military families likely to borrow to bridge unexpected gaps.



The form of military compensation also limits the ability of military families to adapt to financial crises, potentially forcing them to turn to creditors. Much of military compensation comes in the form of non-fungible in-kind goods and services, rather than a traditional paycheck. Military health care, future tuition assistance, military housing, military food, access to commissaries, and access to military recreational facilities and entertainment are all important components of the compensation package for military personnel. 189 Military recruiters understandably use these side benefits as a way of explaining and justifying relatively low military pay. Nevertheless, the non-fungible nature of non-cash compensation prevents military personnel from converting a significant portion of their resources to overcome income shocks and unexpected expenses. If a civilian family car breaks down, because the primary wage earner is likely to receive all or nearly all of his or her compensation in the form of cash payment, the family can divert resources normally allocated to important but ultimately expendable purchases into repairing the car. For instance, the family might be able to forego entertainment or cut back on food expenditures through more [*681] parsimonious shopping. A family that is saving for educational expenses can temporarily halt monthly contributions, or even draw from pre-existing reserves. Cash compensation can be more readily applied to repairing the car (or to servicing a loan balance which paid for repairing the car). This diversion of resources may be more difficult for military families because their pool of fungible resources is relatively smaller than their otherwise identical civilian counterparts. A military family cannot transform its right to receive military entertainment or food into cash. Nor can it transform a military promise to pay future school tuition into cash which might be useful in repairing the car. This is, of course, not to belittle the value of the considerable in-kind compensation military families receive; it is merely to point out its illiquidity. Because military families receive a comparatively greater portion of their compensation in non-cash forms, we should expect that they will be marginally less able to adapt their monthly budget to overcome financial hurdles than will a family that receives liquid cash compensation of the same absolute value.



The military wage distribution system may also give aggressive lenders a relatively greater opportunity to capture the income of enlisted military personnel. As a service to military members, the armed services have allowed members to "allot" their income; creditors, including landlords, utilities, merchants, and others, can be paid directly by the government out of service members' wages. 190 This provides a convenience to service members who may be unable to mail payments while in the field. However, some creditors make allotments a condition of lending money. Margaret Harrell's study of junior enlisted Army personnel suggests that the system tends to encourage service members to take on credit, for which they would not qualify if they were civilians. 191 If true, this would leave members precariously over-extended and vulnerable to high-cost debt marketing. We should also expect that the system will erode the ability of military borrowers to deter creditor over-reaching with the most effective strategy: refusing to repay. 192



3. The Dislocation of Military Service Members



Military service members may be at risk for debt problems because they have difficulty maintaining traditional support networks within the institutional constraints of the armed forces. The military is a prototypical example of what [*682] Lewis Coser called a "greedy" institution. 193 For instance, the military tends to place great demands on its members with respect to geographic mobility. Military personnel are frequently transferred between posts and assignments. Historically, most military assignments last for no more than three years. One study found that 86% of enlisted personnel moved at least once in the three years preceding the survey. 194 Seasoned service members and officers are also expected to change locations frequently. Seventy-six percent of enlisted personnel with seven to ten years of service reported moving three or more times. 195 For officers, this figure rose to 82%. 196 "For those with more than fourteen years of service, 40% of enlisted personnel and 55% of officers reported more than nine moves." 197 Moreover, because there are often waiting lists for military housing, many transfers involve two moves: one into a temporary private rental home and a second move into less expensive military housing when it becomes available. 198



Because of security and training needs, military posts are also often in isolated locations far from mainstream civilian institutions. Even when stationed at bases located in large metropolitan areas, service members face significant emotional and cultural barriers which prevent them from developing a sense of community with nearby civilians. 199 Moreover, many may be hesitant to integrate into civilian communities because they move so frequently. 200 Accordingly, military members are often reluctant to engage in, and are slow to be recognized by, local democratic institutions. 201 Low voter registration and participation rates of military personnel may make local leaders less responsive to financial

hardship suffered by soldiers at the hands of politically aggressive local merchants. 202 Many military personnel also report outright tension [*683] between service members and civilians who live near military posts. 203 Overseas assignments not only create geographic isolation, but also place service members and their families in foreign and sometimes resentful cultures.



These geographic mobility issues dislocate military personnel from their extended families, which can erode their ability to bridge unexpected expenses and income shocks. 204 When a car breaks down, siblings, parents, or long- time friends may not be available to assist with temporary transportation. When a child is ill, or when work requires long hours, grandparents may not be close by to provide free child care. Geographic separation is especially difficult for young enlisted personnel and their spouses, many of whom are away from their families and long-time friends for the first time. 205 There may be less incentive to invest in new friendships and long-term support networks, since these relationships are likely to be severed when the service member is next transferred. 206



Geographic constraints placed on military families also create a significant earnings penalty for the spouses of service members. Although 60% of military spouses work outside the home, they suffer disruption to their careers when the family is forced to relocate. And, because bases are typically in isolated locales which often have depressed economies, there are often few employment prospects for spouses. 207 The military does provide spousal employment services, which aim to help spouses adjust financially to relocation; 208 however, service members rated this service dead last in user satisfaction among all military community and family support programs. 209 Studying this phenomenon in over 18,000 military personnel observations, Payne, Warner, and Little found that three-year rotations caused a 40% decrease in the income that a spouse would have earned had he or she been able to remain at one location for six years. 210 [*684] Recognizing these facts, many military families end up foregoing human capital investments for military spouses because education, training, and occupational experience are less likely to yield returns in the long run. 211 This suggests another risk factor for debt problems because a second income is an important hedge for income shocks and sudden expenses. 212 When one partner suffers a setback, the other can take up the slack to avoid reliance on creditors. Spouses of military personnel are comparatively less able to do this because of the demands placed on military families.



Frequent moves also prevent military members from reaping many of the benefits of home ownership. This is important because family homes are often the most important device for accumulating and stabilizing wealth in the American middle class. Unlike other common middle- and lower-class physical assets, such as automobiles, homes generally appreciate in value over time, giving their owners an investment return. Home mortgages are also forced savings mechanisms which discipline families. As homeowners pay down their mortgages, they accumulate equity in a valuable asset, which they can leverage to obtain low-cost financing. Low-cost home mortgages are a valuable tool in overcoming income shocks and unexpected expenses without relying on high-cost lenders. Similarly, when long-time homeowners suffer a permanent decline in income from illness, divorce, retirement, or job loss, they have the option of selling their home to create a pool of liquid funds with which to restart their financial development. Professor Dalton Conley has argued persuasively that home ownership is also the most important asset in promoting long-term inter- generational transfer of wealth from parents to their children. 213



Because military families move frequently, it makes less sense for them to invest in purchasing a family home. 214 Most financial planners advise that realtor commissions, mortgage loan closing costs, and large interest payments at the beginning of a mortgage loan term eliminate the financial benefits of home ownership for families that plan to own a home for fewer than three years. Moreover, those military families who do end up staying in one location long enough to make home ownership feasible will not usually know this ahead of time. The result is that many military families are forced to rent their homes, either in fact (from a landlord) or in effect (from the real estate sales and finance industry costs). Military housing or housing allowances offset missed home ownership to a degree, but these substitutes do not create investment returns, [*685] forced savings, low-cost borrowing opportunities, or intergenerational wealth transfer effects. 215 Moreover, service members have given these benefits and services low marks, complaining of long waiting lists, poor distribution of information, and poor quality housing stocks. 216



4. Military Culture and Financial Obligations



Military attitudes toward financial problems may facilitate predatory lending to enlisted personnel. The military, both as a matter of policy and institutional culture, steadfastly refuses to allow service members to avoid financial obligations. 217 While this policy is certainly laudable in most contexts, such as child support or tax obligations, it may be more problematic in the context of predatory lenders. The institutional demand that service members have their financial affairs in order is backed up with the very real threat of reprimand, loss of security clearances, bar to re-enlistment, denial of promotion, court martial, and dishonorable discharge. 218 "Soldiers are required to manage their personal affairs satisfactorily and pay their debts promptly," explain Army regulations. 219 "Failure to do so damages their credit reputation and affects the Army's public image." 220 Thus, military service members who do not pay their bills are often subject to intense pressure from their commanding officer. 221 Where many [*686] working-class Americans might simply refuse to pay an over-reaching lender, service members may not have this option. We should also expect that bankruptcy is a less realistic option for most military personnel. Where civilians might be able to defeat over-reaching unsecured creditors by filing a Chapter 7 bankruptcy petition, many in the military might simply refuse to entertain this possibility.



This military cultural commitment to financial responsibility also helps ensure that military personnel are relatively easy to track. For some high-cost lenders, the possibility that the debtor may simply skip town or disappear is one of the greatest risks of doing business. High-cost creditors often employ skip tracing departments and private investigators to track down delinquent debtors. Creditors also face difficulty in delivering service of process on elusive civilian borrowers delaying judicial collection proceedings. Some civilian debtors can obtain an informal "discharge" of their debts by simply disappearing. In comparison, the military maintains a system for locating their service members. Importantly, the military has a defined and mechanical system where it actively assists companies and individuals seeking to serve process on military personnel. 222



The military culture and policies dealing with financial obligations make it relatively more difficult for military personnel to escape their financial past. This fact should make military borrowers a better credit risk which, given efficient price competition, could encourage lenders to pass on lower prices. But it also probably encourages targeting of military service members by lenders who specialize in extending onerous loans to uninformed and overextended borrowers. Predatory lending is, above all, a collection business. Unsecured predatory lenders do not attempt to compete by offering lower prices than their competition, but rather by extracting debts others cannot. The military insistence on repayment under all circumstances may simply assist predatory lenders in making and enforcing questionable loans. Unlike the civilian marketplace, creditors specializing in loans to military personnel can expect a free and effective built-in pressure and tracking network to assist them in forcing payment.



C. Payday Lending to Military Personnel



1. Congress's Position: The Servicemembers' Civil Relief Act



Historically, Congress has not been blind to the financial vulnerability of military personnel. Ever since the early nineteenth century, Congress has taken [*687] steps to protect service members from civil lawsuits brought by creditors. During both the War of 1812 and the Civil War, Congress passed "stay laws" which suspended civil proceedings against soldiers and sailors until they returned from war. 223 When passing similar legislation during World War I, 224 a House Report explained:



[T]here are . . . tens of thousands of men in military service who will be utterly ruined and their families made destitute if creditors are allowed unrestrictedly to push their claims; and yet these same soldiers, if given time and opportunity can, in most cases, meet their obligations dollar for dollar. The country is asking . . . its young men to risk their lives and, if need be, to give up their lives for their country. Before long even more will be asked to make the same sacrifice. Is it more than naked justice to give to the savings of these same men such just measure of protection as is possible? 225



World War II ignited similar concerns, causing Congress again to protect service members, this time with the Soldiers' and Sailors' Civil Relief Act of 1940. 226 This law authorized "temporary suspension of legal proceedings and transactions which [could have] prejudice[d] the civil rights of persons" fighting in World War II. 227 Unlike previous legislation, the World War II law did not [*688] automatically expire at the end of the war. As a result, although Congress amended the Act many times, 228 it stayed in effect until December 2003, when Congress completely overhauled it under the new name of the Servicemembers' Civil Relief Act of 2003 (SCRA). 229



Like previous statutes, the purpose of the SCRA is:



to provide for, strengthen, and expedite the national defense



. . .



[and to enable] servicemembers of the United States . . . to devote their entire energy to the defense needs of the Nation [by providing] for the temporary suspension of judicial and administrative proceedings and transactions that may adversely affect the civil rights of servicemembers during their military service. 230



Among other provisions, the SCRA protects against default judgments; 231 prohibits creditors from repossessing, selling, foreclosing on, or seizing the property of a service member; 232 and protects military families from being evicted. 233 Perhaps most significantly, the SCRA also enables service members to reduce interest rates on any previous obligations to a six percent annual rate. 234



Nevertheless, the SCRA has virtually no impact on payday lending. Payday lenders generally do not take security interests in personal property, making repossession protections irrelevant. And, although the Act requires a reduction in [*689] interest rates to six percent on any debt incurred before going on active duty, 235 the legislation imposes no limit on rates of loans consummated after a service member is activated. Consequently, the SCRA's only threat to the payday loan industry would arise if a service member entered into a payday loan transaction and then, and only then, was called up to active duty. In that case, the SCRA would reduce the annual interest rate on the loan from around 450% to 6% "during the period of military service." 236 Currently, federal law provides no interest rate cap whatsoever on loans made to active duty service members.



Some legislators from both parties have acknowledged their discomfort with this fact. 237 As of this writing, Congress is considering at least one bill, called the Servicemembers Anti-Predatory Lending Protection Act, which would cap annual percentage rates of payday loans to military members at 36%Ca reduction of about 400 percentage points from current average rates. 238 Sponsored by Congressman Sam Graves (R-Mo.), the bill would also prohibit payday lenders from automatically renewing, refinancing, or consolidating a payday loan with the proceeds of another loan without executing a new loan document. 239 The bill has struggled under intense behind-the-scenes opposition from payday lenders. 240 With Representative Graves's bill seemingly stalled, and national attention focused on the well-being of service members suffering from conflict in the Middle East, the issue appears likely to remain at the forefront for some time.

[*690]

2. The Debate: Do Payday Lenders Target Military Service Members?



Given the resurgence of payday lending in the past decade, the factors placing military personnel at risk for debt problems, and the absence of direct federal regulatory control under the SCRA, it was perhaps inevitable that questions over payday lending to service members would develop. Recently, military leaders and rank- and-file enlisted personnel have complained about the harsh consequences of payday loans for service members. A front page New York Times article told the story of a young Navy Petty Officer and his wife who borrowed $ 500 from a Puget Sound payday lender. The sailor's wages could not keep up with the interest forcing him to borrow again and again until he had borrowed over $ 4000Cabout 25% of his annual incomeCin instant loans from lenders with official names like "Military Financial Network." 241 Based on industry records, the article informally estimated that 26% of all military households have borrowed from payday lenders. 242 Network television news bureaus have given airtime to military complaints. 243 Faculty from the Judge Advocate General's School have bemoaned the consequences of payday loans for enlisted personnel, arguing that "[r]arely does the service member emerge from [a payday loan] . . . in better financial condition and often only gets deeper in debt." 244 Rear Admiral David Architzel has complained that payday loans "seem [like] an appealing solution" for the tight budget problems of enlisted military personnel, but actually "compound[] their financial problems by subjecting them to the additional hardships of what are effectively unreasonable interest rates." 245 A director of a state Navy Marine Corps Relief Society, which attempts to assist service members in financial trouble, explained that the payday lending problems for service members are "getting worse, really-much, much worse." 246 A chorus of military personnel and journalists have complained that payday lenders are now flocking to the highways and strip malls near the gates of military bases to feed off the wages of enlisted personnel. 247

[*691]

Consumer advocacy groups have also seized on these complaints and conducted informal investigations over the merits of these claims. Steven Tripoli and Amy Mix, consumer advocates with the National Consumer Law Center, prepared a report discussing a variety of consumer scams and high-priced loans, including payday loans targeted at military service members. 248 The study informally collected business newspaper advertisements, loan contracts, applications, and disclosure statements. 249 The report also includes letters from military leaders complaining of the effects of payday loans and other harsh business practices on service members. 250 Finally, the National Consumer Law Center researchers visited the locale surrounding Kings Bay Naval Submarine Base in southeastern Georgia and Mayport Naval Air Station nearby in northeastern Florida. 251 The report concludes that predatory lending, high-priced goods and services, and other scams are plaguing military communities. 252 Consumers Union, the publisher of Consumer Reports magazine, also has inquired whether payday lenders target military personnel, conducting an informal telephone survey of 31 payday lenders in six Texas cities. 253 The purpose of the informal survey was to show how the payday loan processes work, rather than to collect statistical information on payday lender rates, practices, or clientele. 254 The small survey sample and informal methods did not distinguish between payday loans to military and civilian customers. Nevertheless, the report concluded that payday lenders are targeting military personnel.



Payday lenders vociferously deny these claims, attacking consumer advocacy reports as unscientific. To support their position, the Community Financial Services Association (CFSA), a payday lending industry trade association, has recently retained two public relations firms specializing in reputation crisis [*692] management to influence popular perceptions of payday loans. 255 These firms have issued a press release reporting a telephone survey purporting to establish that few military personnel have borrowed from payday lenders. 256 In conducting the survey, the public relations firms purchased a list of military personnel from Equifax, a credit reporting agency that maintains credit histories of consumers. 257 The firms then telephoned approximately 1000 military personnel, of whom 37 admitted to taking out a payday loan in the last five years. 258 From this, the public relations firms concluded that 3.69% of military personnel use payday loans. 259



However, this telephone survey methodology is seriously flawed for at least six reasons. First, the survey did not speak with spouses of service members, many of whom actually handle family finances, including borrowing money. 260 Second, the survey ignores a classic self-response bias in that many debtors do not admit to borrowing money when approached by strangers. 261 In part a result of personal embarrassment over financial problems, this self-reporting bias is a serious methodological problem that has challenged consumer credit research for over a century. 262 Third, relying on a credit reporting agency for a contact list introduces serious sample problems. Many of the most financially vulnerable service members are as young as eighteen years old, and either may not yet have credit histories with Equifax, or may not be identified as military personnel in those histories. Relying on credit histories for the survey sample probably artificially selects relatively established service members, such as officers and senior enlisted personnel. Fourth, many of the most vulnerable military service members are impossible to reach through a telephone survey. Some junior [*693] enlisted personnel live in on-base barracks that lack individual telephones. Similarly, many service members are currently out of reach in combat zones overseas, even though their families may be financially struggling at home. Fifth, the survey focused on payday loans identified as such, and does not make reference to payday loans masquerading as something else, such as a "sale-lease-back" transaction or "catalog sale" loan. 263 Some survey respondents may have reported not taking out a payday loan, even though they have used a "catalog sale" lender. Finally, the survey authors have not published, nor even publicly released, their survey instrument or methodology for peer review. Given that the public relations firms that commissioned and conducted the study have reputations for bare knuckle political advocacy, the veracity of the survey should perhaps be treated with some caution. 264 Nevertheless, there is certainly some truth to the argument advanced by one lobbyist for payday lenders in Georgia. He asserts: "They're not preying on anybody-they're just open for business." 265



III. Methods



To date, there has been no nationwide, scientific research on whether payday lenders do in fact target military personnel. In Part III.A, we first discuss the viability of using combined geographic and legal analysis to probe issues surrounding payday lending and the military. In Part III.B, we describe our methodology in conducting an extensive empirical study of payday lending to military personnel.



A. Law and Geography: Theoretical Considerations



Interdisciplinary legal and geographic scholarship explores the relationship between law and space. It shows how law and legal institutions can manifest themselves in traceable ways across locations and boundaries. While legal rules are a product of human thought and communication, they are designed to control and influence events in the physical world. Jurists, legislators, and administrators [*694] all perceive the physical world and craft their policies in relation to it. Thus, "law and geography" scholarship uses geographic tools to understand the consequences of legal policies and institutions. In turn, it explores the "inertia of space"Cthat is, how space shapes the process and substance of law. 266



In recent years, many law and geography scholars have come to "interrogate the legal from a critical geographic perspective," often exposing the hidden bigotries of our laws. 267 These scholars sometimes draw inspiration from Foucault, who noted that "[a] whole history remains to be written of spacesCwhich would at the same time be the history of powers (both these terms in the plural)Cfrom the great strategies of geo-politics to the little tactics of the habitat, . . . passing via economic and political installations." 268 For example, Richard Ford has argued that race-neutral local jurisdictional boundaries are vestiges of America's segregated past that continue to racially define residential space and in turn perpetuate a cycle of inequality independent of our private choices. 269 Similarly, David Delaney has examined the way courts have used perceived geographic "facts" to provide authority for limiting constitutional protection of black school children in school desegregation cases. 270 Carol Sanger has pointed out that in the post-automobile world, suburban geographic patterns and zoning ordinances have helped rigidify gender roles by creating the "chauffeur-mother." 271 Leslie Moran uses a spatial analysis of Manchester's gay [*695] village in the United Kingdom as a vehicle to explore heterosexism in law. 272 Moreover, the landmark case Shelley v. Kraemer, which struck down legal enforcement of racially restrictive covenants, is perhaps best thought of as a critical "law and geography" motivated opinion. 273



Other law and geography scholars use geographic tools to tease out otherwise imperceptible legal inefficiencies or to track troubling spatial results of law. For instance, Robert Ellickson has argued that if we used municipal codes of conduct regulating panhandling and other chronic nuisances that varied spatially from street to street, we might better balance rights of homeless people and other city dwellers. 274 Geographic analysis of the Organ Transplant Act showed pockets of inadequate organ distribution and missed opportunities for organ harvesting in rural areas and among ethnic minorities. 275 Erik Luna has advocated the use of crime mapping in developing more transparent, efficient, and fair policing. 276 Robert Goldstein has argued that recent advances in mapping technology have the potential to better measure and conceptualize the success and failures of environmental law. 277



Interdisciplinary law and geography analysis has also produced influential consumer financial services scholarship. Most prominently, several authors have used geographic analysis of home mortgage lending patterns to demonstrate racial bias in approval of credit applications. 278 Moreover, geographic analysis [*696] convinced Congress that in some specific neighborhoods and communities, banks accepted deposits but did not give out equivalent amounts in loans-a process sometimes called "disinvestment." 279 Accordingly, Congress adopted the Community Reinvestment Act (CRA) requiring that depository institutions make efforts to lend in low- and moderate-income neighborhoods within the contiguous geographic area surrounding their office or group of offices. 280 Finally, there is compelling evidence suggesting that check cashers, pawnshops, and payday lenders all disproportionately locate their branches in poor and minority neighborhoods. 281



Our current Article draws on and expands this law and geography literature. Our empirical investigation explores what lessons the spatial relationship between payday lending operations and military personnel might hold for today's policy makers. In particular, this Article seeks to provide a definitive resolution to the national debate over whether payday lenders target military service members. Payday lenders, like most businesses, carefully locate near their targeted customers. For instance, in its Securities and Exchange Commission filing, one national lender disclosed that its stores are located within three miles of their intended market. 282 Accordingly, mapping payday lender locations can reliably determine the extent to which payday lenders target military personnel. [*697] Moreover, if payday lenders do target service members, we consider the extent to which various state legal environments have held this targeting in check. Specifically, we ask what legal approaches, if any, have demonstrated promise in preventing targeting of military personnel for triple-digit interest rate payday loans.

B. Empirical Methodology



1. Study Overview: Sample, Scales of Resolution, and Control Group



Our study analyzes the locations of payday lenders in 20 states. We chose our sample of states based on several criteria. First and foremost, we looked for states that are home to what might best be described as "military towns." By this we mean places where military personnel are the clear consumer demographic, due to either the large population of the military base, the small size of the surrounding communities, or both. Studying payday lender outlet locations in these areas reduces the chance that observed commercial retail patterns would be unduly affected by other demographic variables, such as race or poverty. Second, we sought to analyze military bases in states with a wide variety of legislative and regulatory strategies for addressing payday lending issues. This was necessary to discover whether variation in state regulation created any demonstrable effect on the spatial relationship of payday lenders and military installations. Accordingly, in some cases we also considered states with military installations where military personnel are a less predominant component of local business demographics. Third, we [*698] attempted to include states with bases of special military importance as well as bases from all the branches of the armed forces. Thus, San Diego, California and the Greater Norfolk, Virginia regions were included because of the significant military population residing in those locales, despite the potential for causal noise from their large coextensive civilian populations. States with little or no military presence were not included in our study.



For each of these 20 states, we attempted to construct maps and statistical analyses based on four levels of geographic resolution. First, for each state we made several generalizations about the intensity of payday lending in that state as compared to others. Second, we conducted countywide statistical analyses. County- level analysis enables comparison of the distribution and density of payday lenders within a state, and it provides an important scale by which to examine industry density locations relative to military installations. Because military bases are often as large as counties themselves and may have several scattered off-base retail and service districts, the county-level resolution sometimes catches concentrations that disappear at more local scales. Third, we analyzed every ZIP code region in each of the 20 states. 283 Maps at this scale are especially useful because ZIP code regions frequently replicate the market range and threshold parameters used by site location analysts who very likely figure heavily into the final location of banks and payday lenders. 284 In other words, most local ZIP code regions contain those consumers whom payday lenders operating in that ZIP code hope to attract. And fourth, several military installations were chosen as focal points for more detailed, street-level case analyses of payday lending. At this "neighborhood" scale, specific street addresses were mapped for an entire county or counties in which the base(s) is located. Not only does this allow us to know the absolute location of payday lenders throughout a county, but it also allows us to track the distance from base gates and service member quarters.



To further refine the validity of our study, we also mapped all bank and bank branch locations in all 20 states. The bank control group allowed us to compare the number of payday lenders with the number of banks in a given state, county, ZIP code region, or neighborhood. And mapping banks also allowed us to compare the distance separating payday lenders and military bases with the distance separating banks and military bases. These comparisons are important because they provide spatial context, giving us something of a barometer of commercial activity in an observed locale. Mapping banks also helps account for variations in zoning regulations. For example, it is theoretically possible that current or past zoning ordinances might force payday lenders into geographic areas in close proximity to military bases, even though military personnel are not making relatively greater use of payday lender services. This becomes a much less plausible explanation of payday lender locations if payday lenders are clustered near military bases, but banks, who face similar zoning rules, are not. By mapping banks, we gain some insight into where retail and service activity is permissible in the towns and cities we are analyzing and get a good idea of where consumers are likely to be found.

[*699]

2. Data Sources and Mapping Techniques



To complete our study, we required four types of data: population information, military base locations, bank locations, and payday lender locations. All civilian population information was obtained from the U.S. Census Bureau. 285 The absence of an authoritative reliable source for military population made analysis requiring this information somewhat more problematic. Because military personnel are frequently being deployed, reassigned, trained, and moved, many of the bases we contacted were unable to give us reliable manpower figures. After consulting with representatives from the Department of Defense (DOD), we selected the DOD's annual Base Structure Report of 2004 as our primary databank. 286 Data regarding personnel was cross-referenced with a report published by the DOD's Statistical Information Analysis Division 287 as well as with the data from the Census Bureau.



Data on military base locations in general is widely available. However, the precise boundaries of military bases are sometimes ambiguous. In delineating base boundaries, we primarily relied on maps issued by the United States Geologic Survey (USGS) and published by the Environmental System Research Institute (ESRI). However, we found several instances where USGS maps did not match maps created by either the U.S. Department of Transportation or other private digital map vendors. Discrepancies in base location were resolved via telephone calls to information offices at individual bases. Many bases are large and include multiple parcels of land, sometimes flung over several counties. Where this was the case, the ZIP code region(s) containing the base headquarters and the majority of on-base housing was used to delineate the boundaries of the military installation under consideration.



While bank and bank branch addresses were easily obtained from the Federal Deposit Insurance Corporation (FDIC), 288 obtaining reliable data on payday lender locations proved more challenging. We obtained the addresses of payday [*700] lenders from the state regulatory authority charged with oversight of payday lenders in all but three states included in the study. In most instances, regulatory oversight offices host a website where the addresses of payday lenders can be downloaded; several other states sent lists of payday lenders via electronic mail or as paper copies via U.S. Postal Service. Though we believe the individual licensing agencies are the best source for addresses, we do not believe they are comprehensive. Ample anecdotal evidence suggests that many payday lenders operate without a license from the state. We were able to phone several payday lenders listed in local telephone directories that were not licensed or included on the list of payday lenders provided by various states. Conversations with state authorities and other industry observers confirmed our observations. 289



Though incomplete, we are confident that the lists provided by the states do include businesses engaged in the business of payday lending. To that end, each regulatory authority was contacted in order to ensure that the criteria used to define "payday lender" in our study was consistent from state to state. In three states vital to our survey-New York, North Carolina, and Texas-we could not obtain adequate data from state regulators, and accordingly we used alternative data gathering strategies. Our data collection methods for these three states are elaborated in Part IV alongside discussions of the law and empirical findings in those states.



In terms of mapping technique, we used commercial mapping software to map the addresses of individual payday lender and bank locations onto TIGER centerline files. 290 Using these files, we are able to enter a database of addresses into mapping software that places points on street maps indicating the location of each address. For each case study location, a minimum 75% match rate was achieved; but in most cases, especially for payday lenders, match rates of over 90% were realized, giving us reliable sample sizes and excellent statistical confidence. 291 Matched addresses were randomly checked for accuracy by cross- [*701] referencing matched locations with several widely available on-line address-matching services. 292



3. Statistical Analysis of Payday Lender Location Density



Maps were analyzed using simple, widely-understood statistical measures in hopes that the findings would be transparent to the widest possible audience. At the county and ZIP code levels, three basic measures of payday lending were employed. The first was the total number of payday lenders per geographic region. The second was payday lenders per capita, generally expressed in terms of payday lenders per 100,000 persons. The third measure we used is a measure of payday lending density relative to banking density. Professional geographers have a variety of commonly accepted methods for measuring relative location density of two business types. Most geographers typically use a standard business density formula known as a "location quotient." 293 In calculating payday lender density relative to banks, we used statistically acceptable variations on the standard location quotient formula tailored to capture subtle differences in payday lender and bank density for our county and ZIP code level analyses. 294

[*702]

Next, we ranked each of these three statistical measures against their intrastate counterparts, with the lowest rank (first) in each category assigned to the county or ZIP code with the highest score on each variable. So, for example, the county with the highest total number of payday lenders would therefore receive a rank of first in that category. Similarly, the ZIP code region with the highest relative density of payday lenders in comparison to banks would receive the first place ranking for that category. Finally, the ranks for all three categories were averaged together to produce a composite index for each scale level. Because the composite index is a function of our three measured categories, the lowest ranked counties and ZIP code regions will generally feature a relatively large number of payday lenders, a relatively high density of payday lenders per capita, and a relatively high ratio of payday lenders to banks. These composite index scores were also assigned ranks with the highest composite index score again receiving the first place ranking. Importantly, our composite index scores create an opportunity to express the proximity of the payday lending industry as a whole in any given county or ZIP code to military bases with a single, easily comparable number.



In order to give us some perspective on the per capita density of payday lenders in any unit of analysis, such as a ZIP code, we calculated the statewide average for payday lenders per 100,000 people. By multiplying the statewide average by the population in smaller-area units, such as a ZIP code, we were able to predict the number of payday lenders that should be in that unit of analysis, if it were to conform to the statewide average. 295 Finally, we compared our [*703] prediction, or "expected" number, of payday lenders against the actual number of payday lenders observed in each geographic unit. This allowed us to accurately characterize the actual number of payday lenders as being in excess of, equal to, or below the statewide per capita average for any given regional population.



For those bases mapped at the neighborhood level, we analyzed data in a manner we hoped would show differences in the prevalence of payday lending close to and far away from a given base. In these analyses we adopted two spatial categories: neighborhoods were "near" a base when they were located within a three-mile radius of the base, while "distant" neighborhoods were outside the three-mile zone. We chose the three-mile radius following the industry's own commonly agreed-upon store location goals. 296 In several maps presented later, we used mapping software to draw buffer zones one, two, and three miles around each base. Then we counted the number of people, payday lenders, and banks both within and outside the three-mile buffer zone. 297 "Near base" census tracts could then be statistically measured against those outside the three-mile buffer. Near base tracts could also be measured against countywide and statewide averages. Statistical measures employed at the neighborhood level included the absolute number of payday lenders and banks and the density of payday lenders and banks per capita. These near base statistical analyses provide a useful quantitative snapshot of the landscape immediately surrounding military service members.

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IV. Results: The Law and Geography of Military Payday Lending Juxtaposed



A. Federal Banking Law and the Marquette Doctrine: A Backdrop to American Payday Lending



The law and geography of payday lending to military personnel in individual states cannot be understood without an appreciation of federal banking law in general and the landmark case of Marquette National Bank v. First Omaha Service Corp. in particular. 298 The Marquette decision interpreted a Civil War era congressional statute called the National Bank Act. 299 When Congress passed the National Bank Act in the 1860s, states and the federal government were competing aggressively for regulatory and tax control over the emerging American banking industry. 300 Banks could (and still can) receive their charters either from state governments or from the federal government. 301 Both the states and the federal government were actively encouraging banks to choose charters from their own level of government. 302 In order to entice banks to charter at the state level, some states passed laws allowing state banks to charge higher interest rates than federal chartered banks lending within that state's borders. 303 Claiming unfair discrimination against federally chartered banks, and fearing encroachment on its tax and regulatory power, Congress drew on its authority under the Commerce Clause of the U.S. Constitution to prohibit states from authorizing higher permissible interest rate caps for state banks than for federal banks. 304



Over a hundred years later, the growing credit card industry in the 1970s [*705] forced the Supreme Court to face a novel question. The issue was which state's interest rate cap applies when a bank located in one state loans money across borders at an interest rate in excess of the state interest rate cap where the borrower lives. The Marquette Court held that the National Bank Act-which originally leveled the playing field between federal and state banks-now authorized federally chartered national banks to export the interest rate cap (or lack thereof) of a bank's home state to consumers in other jurisdictions. 305



The Supreme Court's intervention in what had been state lawmaking was the starting gun in a corporate race to the bottom that significantly eroded the power of state governments to set meaningful interest rate caps. 306 Lenders quickly relocated in states with no interest rate caps such as Delaware and South Dakota and exported those laws to states that chose more aggressive price regulation. 307 States with interest rate caps became much more amenable to removing them in order to hold on to their financial services industry jobs. 308 Because the Marquette decision only applied to national banks, state chartered banks were at a significant competitive disadvantage. 309 Bowing to pressure by state banks, Congress included language in the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA) that allowed state banks to charge interest at the rate allowed by the laws of the state where the bank is located. 310 Section 521 of this act granted exporting powers to state banks similar to those of national banks. 311



The extent to which the Marquette decision (for national banks) and § 521 of DIDMCA (for state banks) applies to payday lending currently remains in flux. Payday lenders, at least some of whom have always sought new ways to circumvent state interest rate caps, began attempting to use the Marquette exporting doctrine to their advantage in the 1990s. 312 In general, banks were unwilling to risk their own reputations by offering triple-digit interest rate loans out of their own branch lobbies in their own communities. However, a small minority of banks were willing to form business relationships to make payday loans through storefront payday companies usually located in other states. In [*706] these transactions, which have become standard in the industry, the payday loan company manages marketing, staff, locations, customer service, and loan applications, but the bank advances the loan funds to borrowers. On paper, every loan is "made" by the bank, but the name on the door is that of the payday loan company, and the only person the borrower ever sees is an employee of the payday lender. 313 By prior agreement, the payday loan company usually then immediately purchases the right to receive payment from consumers back from the bank. 314 Then, the payday loan company goes on to handle the most important aspect of the business: collections. The bank, in effect, "rents" its charter powers under the Marquette doctrine or § 521, either in exchange for a per loan fee or for ownership in a small percent of the proceeds of each loan. 315 The entire point of the business relationship is to circumvent interest rate caps adopted by state legislatures. 316



Not surprisingly, many bankers and bank regulators were extremely uncomfortable with these "charter-renting" relationships. In 2002, the Office of the Comptroller of the Currency (OCC) used its oversight powers over federally chartered banks to crack down on charter-renting. Speaking on the Marquette doctrine, the Comptroller of the Currency explained:



Let me raise one . . . caution . . . . The benefit that national banks enjoy by reason of this important constitutional doctrine cannot be treated as a piece of disposable property that a bank may rent out to a third-party that is not a national bank. Preemption is not like excess space in a bank-owned office building. It is an inalienable right of the bank itself.



. . .



Indeed, the payday lending industry has expressly promoted such a "national bank strategy" as a way of evading state and local laws. Typically, these arrangements are originated by the payday lender, which attempts to clothe itself with the status of an "agent" of the national bank.



. . .



Not only do these arrangements constitute an abuse of the national charter, but they are highly conducive to the creation of safety and soundness problems at the bank, which may not have the capacity to manage effectively a multistate [*707] loan origination operation that is in reality the business of the payday lender. 317



Following this reasoning, one by one, the OCC gave negative oversight evaluations to every federally chartered bank involved in payday lending. 318 Under threat of losing their bank charters, all national banks terminated their charter-renting relationships with payday loan companies.



State-chartered banks have been a different story. Banks chartered by state governments are primarily regulated by that state's bank examiner or department of financial institutions. However, state-chartered banks also receive oversight from the Federal Deposit Insurance Corporation (FDIC), which is an independent federal agency created in 1933 in response to bank failures during the Great Depression. 319 State banks are under FDIC oversight because the banks purchase federal insurance from the FDIC to protect the bank accounts of their customers from theft and other losses. Unlike the OCC, the FDIC has turned a blind eye to charter-renting, taking the position that state bank charter-renting to payday loan companies is just as legal as the credit card loans made in the Marquette case. 320 Consumer advocates have responded by furiously accusing the FDIC of undemocratically undermining every usury law in the nation. 321 But the FDIC, which has an institutional history and culture focused almost exclusively on preventing bank failures, has essentially ignored the consumer protection concerns of payday lending critics. 322 Thus, payday loan companies and state banks continue to claim a license to ignore state interest rate laws. Under this highly controversial interpretation of the law, so long as officials at the FDIC and one state government in the entire country refuse to prevent 450% loans, one state bank located in that one state may empower payday loan companies to export the state's law (or lack thereof) to every borrower in the country. Sheltered under this protective regulatory umbrella, twelve state banks of the more than 5200 institutions currently supervised by the FDIC continue to act as facilitators for many of the nation's payday loan companies. 323



For their part, courts have not been able to agree on a definitive legal resolution as to whether banks and payday loan companies may use the [*708] Marquette doctrine to simply disregard state interest rate laws.