Are Predatory Lenders Ripping Off Our Nation's Finest?

They prey on U.S. troops, threaten military readiness and put high-ranking officials on edge. But they're no foreign enemy.

The Department of Defense worries about predatory lending outfits that offer high interest, short-term loans to military employees, such as Navy Air Traffic Controller Matthew Hubbell, pictured here.

(ABC News)

They are payday lenders, shops that provide short-term loans for excruciatingly high annual rates, anywhere from 300 percent to 2,000 percent interest. Attracted by friendly advertisements that promise fast cash, many service members borrow, then get trapped in a cycle of debt. "In five or 10 minutes, you've got $500 cash," Matthew Hubbell, a Navy Air Traffic Controller told ABC News.

It seemed like easy money, and he accepted a short-term loan to stay afloat while his wife was battling breast cancer. But what started out as a $500 loan quickly snowballed.

Two weeks after Hubbell first borrowed the money, he was expected to pay it back in full. But if he did that, he'd have empty pockets and a family to sustain. So he rolled over the loan for another two weeks.

"When that payday comes around, you have to give all your money back to the company so that now you don't have money to pay bills," Hubbell said.

Eventually, he was paying an annual interest rate of 390 percent. And he's no isolated example. The military says one out of five service members borrowed from payday lenders in 2005, and a member of the military was three times as likely as a civilian to go to a payday lender.

This trend concerns the Department of Defense, which recently came out with a report stating these unscrupulous lenders can undermine military readiness and harm the morale of troops and their families. (Read the report)

Earlier this year, the Senate passed a defense appropriations bill with an amendment that caps the interest rate charged by payday lenders at 36 percent instead of the 300 percent-plus they often charge. That amendment, sponsored by Sens. Bill Nelson, D-Fla., and Jim Talent, R-Mo., now awaits passage by the House.

Preying on the Proudest?

True, service members take out payday loans of their own free will.

But payday lenders tend to cluster around military bases, according to a 2005 study by Steven Graves, an assistant professor at California State University, and Chris Peterson, an assistant professor at the University of Florida's College of Law. They surveyed 20 states for payday lenders by ZIP code and found "irrefutable geographic evidence demonstrating that payday lenders are actively and aggressively targeting U.S. military personnel," the study said.

The researchers also did a count and discovered more than 22,000 payday lenders nationwide, which is more than the number of McDonald's or Burger King outlets combined.

Within 30 miles of Matthew Hubbell's base, there are at least 117 short-term lenders serving local military clientele.