Do We Really Need Payday Lenders in Wisconsin?

They were kicked out of North Carolina, are constitutionally banned in Arkansas and heavily regulated in Minnesota. The Bush-era Department of Defense found that they are a threat to members of the military.

What do these folks know that we don’t? Payday lenders thrive in Wisconsin with no limits on what they can charge their customers. And, not surprisingly, they are more likely to trap their customers in a cycle of long-term debt than to solve the borrower’s immediate financial crises.

Back in 1995—when the cap on interest rates was lifted by then-Gov. Tommy Thompson and a compliant Legislature— only two licensed payday lenders existed, according to the Wisconsin Legislative Reference Bureau (LRB).

Since then an entire payday loan industry has sprung up around the state—from storefronts in Milwaukee’s inner city to strip malls in affluent suburbs like Germantown and outlets all the way Up North in Superior, where instant-cash stores moved after Minnesota cracked down on them.

Today, 542 payday lenders exist around the state, more than 40 of them in Milwaukee, where the Common Council attempted to regulate them through zoning in 2004—the city’s only tool in combating the spread of payday loan stores that prey on those stuck in a financial emergency with few options.

These payday shops—64% of which are owned by out-of-state interests—made almost 1.7 million loans in Wisconsin in 2008, when they lent out $732 million, according to the state Department of Financial Institutions (DFI). The average loan was $428.

The LRB found that the average loan applicant’s gross income in 2000 was $24,673, indicating that payday lenders are making loans to the working poor and those receiving government benefits such as Social Security.

What’s most distressing is that the borrowers aren’t getting much bang for their buck. The LRB found that the annual percentage rate charged was an astounding 542%. (Even Advance America, a national payday lender, admitted its annual percentage rate is 391%.) So if a loan is refinanced four times—a common occurrence—it will cost nearly $200 to borrow $200 for ten weeks, according to the state of Wisconsin’s calculations.

Just think—back in 1994, the maximum interest that could be charged was just 18%. Now, payday lenders can and will charge whatever their desperate customers will pay.

A Short-Term Solution or a Long-Term Trap?

Advocates for payday lenders say their product is a responsible way to solve shortterm financial problems—safer and less expensive than going to some loan shark on the street, taking out a loan on the Internet, or bouncing checks or maxing out one’s credit card.

“We look at our product as a short-term lending option for consumers, the vast majority of which fare very well with it,” Erin Krueger, of the Wisconsin Deferred Deposit Association, told the Shepherd back in June. (The Wisconsin Coalition for Consumer Choice didn’t return a request for comment for this article.) “To deny that access to a choice is something we’re very concerned about.”

Payday loan customers can go to a storefront in their neighborhood with a paycheck stub or their award letter for Social Security or Supplemental Security Income, along with a bank statement, IDs, and their checkbook. They’ll fill out a form and exit with cash in the time it takes to order a pizza.

The industry claims that the majority of their customers quickly pay off their loans free and clear, and the industry adds jobs and taxes to the state’s economy.

But the Center for Responsible Lending (CRL) paints a very different picture of the $28 billion industry. Based on its national survey in 2003, the think tank found that “lenders collect 90% of their revenue from borrowers who cannot pay off their loans when due, rather than from one-time users dealing with short-term financial emergencies.”

The report concluded that payday loans are “designed to be renewed,” because the company can make more money off of rolling over loans for existing customers and adding more fees and interest to the original loan than the lender can make by issuing new loans to new customers who walk in the door. What’s more, the loan isn’t issued based on the customer’s ability to pay it off in reasonable amount of time, so borrowers are forced to rollover their loans and pay more interest and fees.

Instead of solving the borrower’s problems, that immediate infusion of cash can trap the unsuspecting borrower in an ever-increasing spiral of debt.

“Over time the borrower finds it harder to pay off the loan principal for good as fees are stripped from their earnings every payday,” CRL reported. “They are frequently trapped paying this interest for months and even years, and may go to a second or third payday lender in an often fruitless attempt to escape the trap. The process of loan flipping creates the long-term cycle we call the debt trap.”

An Army of Lobbyists Fighting the Interest Cap

According to CRL’s estimates, in 2005 alone at least $124 million was paid in interest on payday loans issued in Wisconsin. That’s millions of dollars in interest that could be kept in the pockets of cash-strapped seniors or workers who are living from paycheck to paycheck and struggling to pay their bills, whether they’re being paid less than a living wage or getting hit with a financial emergency like a medical bill or car repair.

And the payday loan industry would prefer to keep it that way. They’ve hired 27 lobbyists to fight a bill soon to be introduced in the Wisconsin Legislature that would cap the interest rates on payday and auto title loans at 36%, the same rate that Congress and the Donald Rumsfeld-led Department of Defense determined would protect military personnel and their families from predatory lenders. A similar bill is being debated in Congress. Industry advocates say the 36% cap would put them out of business because it’s not enough to cover their costs.

A bill containing the 36% cap had been introduced by state Rep. Thomas Nelson (D-Kaukauna) in the previous legislative session. But it died without a hearing in the Republican-controlled Assembly, although legislators were treated to a coffee and donuts tour of a payday loan store.Now the Assembly Majority Leader, Nelson said if the 36% interest rate cap is the best protection for members of the military and their families, then it’s the best protection for Wisconsin’s cash-strapped workers, seniors and those with disabilities.

“Rumsfeld and Congress explored a variety of ways to regulate the industry, such as increasing disclosure and limiting rollovers,” Nelson said. “And they determined that this [interest cap] was the only solution to ending predatory lending.”

The 27 industry lobbyists are being well paid to block this year’s attempt to cap interest at 36%, a bill authored by Rep. Gordon Hintz (D-Oshkosh), who chairs the Assembly’s Committee on Consumer Protection. Hintz already has the support of 43 of the 99 members of the state Assembly, and 15 of 33 state senators, and the bill hasn’t even been formally introduced.

The bill’s bipartisan co-sponsors span the spectrum of political ideologies, from Milwaukee Democrats such as Rep. Jon Richards and Sen. Lena Taylor to conservative Republicans such as Sen. Glenn Grothman of West Bend and Sen. Alan Lasee of De Pere. Community supporters include the AARP, Wisconsin Council on Children and Families, the Wisconsin Catholic Conference and Citizen Action of Wisconsin.

Grothman said eight payday lenders have sprung up in West Bend, a city of 30,000 people. “They’re obviously taking advantage of financially illiterate people,” Grothman said. “They’re providing no benefit to society. They are solely bleeding financially illiterate people and taking their money out of state.”

Hintz said that the 36% interest rate cap—twice what it had been before 1995—is the only proven way to protect vulnerable borrowers in a time of need. He said he knows that the industry is lobbying hard to protect its hundreds of millions at stake in Wisconsin, but that his bill would put millions of dollars back into the pockets of struggling workers.

“The statewide response to the effort that we’re putting forward, and the support and the encouragement and the hopes that we would actually do something, that we’d do the right thing, is what I’m banking on,” Hintz said. “At a time when there’s little money at the state level, I think the issue is more important than ever.”

Blaming the Borrower

But Hintz’s bill isn’t the only payday reform proposal circulating in the state Legislature. Not surprisingly, a more industryfriendly bill has also been introduced, one that imposes some regulations that could be easily circumvented and would do little to help the most financially vulnerable among us. A weak bill authored by former Republican Rep. Sue Jeskewitz was vetoed by Gov. Jim Doyle in 2004.

As Doyle put it in his veto message: “The provisions of this bill do little to change the current practices of payday lenders or to improve on current consumer protection laws.”

What is surprising, however, is that a handful of Democrats, who now control both houses of the state Legislature, are supporting the industry-friendly bill, which limits the number of rollovers and how much a consumer can borrow from a payday lender, and requires a “down payment” from the borrower before he or she is allowed to roll over a payday loan.

The industry-friendly bill, AB 311, has been introduced by Milwaukee representatives Josh Zepnick, Pedro Colon, Annette “Polly” Williams and David Cullen, as well as state Sen. Jeff Plale. (Colon and Cullen have also signed on to Hintz’s stronger bill.) Zepnick’s bill has already been referred to the Assembly Committee on Financial Institutions, chaired by Milwaukee Rep. Jason Fields.

Zepnick and Plale did not respond to requests to comment for this article. But in a press statement, Zepnick seemed to place the blame on payday loan consumers: “The key ingredient to someone trapped in payday lending troubles has nothing to do with the interest rates; it’s borrowing more than can be paid back and rolling over the debt from one paycheck cycle to the next,” Zepnick’s statement noted.

State Rep. Marlin Schneider (D-Wisconsin Rapids) and Alan Lasee (R- De Pere) have introduced a bill that would cap interest rates at 2% a month, or 24% a year, and allow a borrower to sue a lender for abuses. State Rep. Andy Jorgensen (D-Fort Atkinson) has drafted a bill but hasn’t formally introduced it yet.

Other Options

Zepnick did acknowledge that there are abuses in the industry.

Lisa Lee, an examiner at the state Department of Financial Institutions, said that her office frequently receives calls from worried payday loan customers who have gotten threatening messages from their payday lender. “They want to know if it’s a criminal offense not to pay off one of these loans,” Lee said. “They’re sometimes threatened with jail.”

She said that defaulting on a loan is not a crime, but that the borrower could be taken to small claims court or have his or her wages garnished until the loan is paid off.

Christine Henzig, of communications for the Wisconsin Credit Union League, said that workers and retirees needing a short-term credit solution can look to the various products offered at non-profit credit unions. While they often aren’t marketed as “payday loans,” credit unions and some banks are increasingly devising products that can get someone out of a jam—and improve their credit score in the process, as the borrower pays off the loan according to a workable timeline. Some credit unions will consolidate a member’s outstanding payday loans.

Henzig said that those seeking a loan must become members of a credit union, which typically means opening an account and depositing $25. Credit unions provide financial counseling and, like banks, will consider one’s ability to pay off the loan. Henzig said credit unions offer loans as little as $500, and some will even issue a loan of $100 if someone truly needs that money. She said the business models of payday lenders and credit unions are philosophically opposed. “Whereas the payday lender model is trying to keep the borrower stuck, the credit union’s loan model is designed to help the member pay it off successfully,” Henzig said.