For nearly five years, federal law has set strict guidelines on risky loans doled out to members of the military, after numerous reports documented how payday lenders were preying on soldiers and saddling them with enormous debts.
But traditional banks that are now offering payday loan-style products have been able to get around those laws, offering short-term loans with interest rates far above the 36 percent annual limits set for members of the military.
Sen. Jack Reed (D-R.I.) introduced an amendment on Friday aimed at closing this loophole, which has been used by banks including Wells Fargo, U.S. Bank and Fifth Third Bank.
The move will "ensure that lenders cannot evade the original purpose of the act by simply placing a different label on the same exorbitantly high-interest payday loans the act aimed to prohibit," read a letter written Friday by retired Army Gen. Gordon R. Sullivan, president of the Association of the United States Army, a military support group.
Consumer advocates have long criticized payday loans, which often carry high interest rates and fees that can leave borrowers trapped in a long-term debt cycle, unable to pay off the original loan. A 2006 report from the Department of Defense documented how payday lenders and other high-interest operations were setting up shop outside of military bases, offering products to soldiers struggling to make ends meet on meager paychecks.
High debts can directly impact a soldier's career: privileges such as security clearances can be revoked, as a soldier could be viewed as susceptible to bribes from foreign governments. Congress stepped in with laws in 2006 that capped interest rates at 36 percent for certain loans to the military, including payday loans.
But in recent years, many traditional banks have started to offer products that closely resemble payday loans. Known as "account advances," such loans come with high fees that carry effective annual interest rates of more than 300 percent -- $10 for every $100 borrowed at U.S. Bank and Fifth Third Bank, $7.50 for every $100 borrowed at Wells Fargo, according to a recent report from the National Consumer Law Center.
The money is fronted to an account holder and then debited, along with the fees, when the customer gets the next direct deposit, regardless of whether there is enough money in the account to cover the loan.
The 2006 military lending limits applied to traditional payday loans, but the Department of Defense did not prohibit such cash advances from traditional banks. As more traditional banks have turned to such payday loan products as a way to earn additional fees from customers, advocates for the military have called for the 36 percent caps to also apply.
"It's basically the same thing," said Lauren Saunders, an attorney with the National Consumer Law Center. "Traditional payday lenders take your paper check and hold that until your payday. The banks hold your money until your next deposit, and then have the right to grab it as soon as it comes in."
Wells Fargo, Fifth Third and U.S. Bank did not respond to requests for comment Friday.
The amendment, tacked on to a Defense spending bill in the Senate, is not expected to come to a vote until after Thanksgiving.