Thursday, August 27, 2009

Update on predatory payday loan legislation

I recently addressed the subject of predatory payday loan practices in Wisconsin, a post which almost immediately attracted the attentions of industry insiders, after it was announced that Rep. Gordon Hintz (D-Oskosh) was planning to introduce legislation to cap the amount of interest that could be charged on these types of transactions.

I have to give credit where credit is due: those industry insiders definitely have their lines down pat. The claims run from them offering a "necessary" service to people who wouldn't otherwise be able to get access to needed funds, and that looking at the APR for these "short-term" loans is unfair.

It's a well-polished line, for sure. Thankfully, Rep. Hintz and 58 of his fellow legislators aren't falling for it. AB 392 (the Predatory Lending Consumer Protection Act) was officially introduced yesterday. If passed, it would place a 36% interest rate cap on payday lending stores - a number decided upon by Congress when it passed similar legislation to protect military families from shady lending practices.

I have no doubt that the bill faces a massive uphill challenge. The payday lending industry has faily deep pockets and lots of lobbyists. Don't be surprised if you start hearing a lot from both sides of the issue in the coming weeks and months. But don't be fooled. Regulating the rates of these loans is a crucial part of keeping the most vulnerable members of society from falling into traps that will only serve to keep them vulnerable. It's not the end-all-be-all solution to the much larger problem, but it's an important facet.

You can be sure I'll be writing more about this in the future--going more in-depth, interviewing the people involved in the issue, etc.--so keep your eyes peeled.

Read Rep. Hintz's press release about the bill here:

Predatory Lending Consumer Protection Bill Formally Introduced
with Strong Legislative Support
AB 392 introduced with 58 legislator co-sponsors

OSHKOSH–Rep. Gordon Hintz (D-Oshkosh) introduced the Predatory Lending Consumer Protection Act with strong bi-partisan legislative support. Assembly Bill 392 will protect against predatory lending by enacting a 36% interest rate cap for payday lending stores. The bill was introduced with 43 co-sponsors in the State Assembly and 15 in the State Senate.

“This unprecedented level of support demonstrates that predatory payday lending reform is a high priority for the legislature” said Hintz. “Passing AB 392 into law is necessary and long overdue. Taking advantage of people in desperate times with no consideration of income and unaffordable repayment terms erodes worker earnings and for many imposes a high-cost debt burden that can be devastating. Unregulated payday lending is neither a necessary service nor sustainable model for the long-term economic prosperity of our state.”

Currently, Wisconsin payday lenders can charge triple-digit interest rates. A study by the Wisconsin Department of Financial Institutions reported the average APR for a payday loan is 542.2%, while the average annual net income of payday borrowers is less than $19,000 and that over half of the loans analyzed were refinanced.

In 2005, Wisconsin consumers paid an estimated $124 million in fees. Bankruptcy, evictions and taxpayer assistance are not uncommon results. This crushing debt exacerbates income inequality and undermines long-term economic prosperity.

AB 392 establishes a uniform protection through a rate cap that will:
  • Protect against unaffordable repayment terms
  • Eliminate the lack of consideration of a borrower’s outstanding debt payments or ability to pay
  • Reduce the never-ending debt cycle of high-cost debt
  • Protect worker earnings and benefits
  • Save citizens millions of dollars annually
  • Provide to our citizens the same protections we provide active military members and their families

“The $40 billion payday industry will fight any meaningful reform efforts to preserve their profits made off of the vulnerable who can least afford to pay it. That is why the strong support in the Assembly and Senate is so encouraging. We have the opportunity to do what is right for our citizens and our state.”

Payday lending is a relatively new phenomenon rising after Wisconsin eliminated its usury law in 1995 that capped interest at 18% to enable creditors to compete nationally. The unintended consequence was the rise of predatory payday lending. In 1995, Wisconsin had 17 payday lenders; today there are more than 542. Rates charged today were illegal for most of Wisconsin’s history.

Payday lenders have become such a problem that some communities in Wisconsin have taken matters into their own hands and passed local ordinances. The list of communities that have addressed this include Milwaukee, Racine, Pleasant Prairie, West Allis, Green Bay, and Superior. But what Wisconsin really needs are statewide protections to prevent lenders from just relocating over boundary lines.

The Predatory Lending Consumer Protection Act establishes the same 36% interest rate cap that Congress enacted in 2007 after determining it was necessary to protect military personnel and their families from the debt trap. Fifteen states and the District of Columbia have either prohibited payday lending outright or established a two-digit interest rate limit.

“It is no longer acceptable for the Legislature to look the other way and ignore this problem. Wisconsin fails to have any law or meaningful regulation on the books. We will always have a challenge providing credit to people outside the financial mainstream. But ending the most abusive (and profitable) lending practices and encouraging reasonable credit services will enable people needing these services to keep more of their income. Passing AB 392 is the first step. It is time to pass the Predatory Lending Consumer Protection Act to curb abusive payday lending in Wisconsin.”

AB 392 has a strong constituent support. Wisconsinites for Responsible Lending (WRL), a grassroots constituent based organization formed in support of AB 392 represents a diverse coalition of organizations including Wisconsin State AFL-CIO, AARP, Legal Aid Society of Milwaukee, and La Casa de Esperanza, Inc. (Additional information about WRL and its members can be viewed online at http://www.consumer-action.org/coalition/articles/wrl.)

The bill also has the support of the Wisconsin Catholic Conference and the proposal was a part of U.S. President Barack Obama’s Plan to Strengthen Working Families.

15 comments:

MaryRW said...

Great post, Emily. Thank you so much for bringing this to our attention! I couldn't quite figure out whether it was time to contact Representative Joe Parisi to ask him to support the bill, although I'm sure it wouldn't hurt. What do you think?

Emily said...

I'm also sure it wouldn't hurt. I'll know more after I speak with Rep. Hintz, and I'll definitely post more about it soon.

Anonymous said...

"keeping the most vulnerable members of society from falling into traps..."

What are these traps you speak of?

"It's a well-polished line, for sure. Thankfully, Rep. Hintz and 58 of his fellow legislators aren't falling for it. AB 392 (the Predatory Lending Consumer Protection Act) was officially introduced yesterday."

Apparently Hintz +58 have their own well-polished lines as well. Wasnt it determined that what they do is not predatory??

Why do you assume that those against this are all industry shills?

Im just a guy that took advantage of their services and found nothing shady about their practices.

-Shane

Anonymous said...

Still waiting to hear what the "traps" are that you speak of...


-Shane

Briane P said...

While I applaud the legislature's efforts to protect consumers, I question the need for an entirely new law.

I'm a consumer lawyer and I represent mostly debtors, but I don't think that outlawing all such lending is necessarily the way to go.

I'm not sure where this law will fit in the canon now, but we already do have the Wisconsin Consumer Act, which prohibits unconscionable practices. You may recall that the Supreme Court of Wisconsin used the WCA to invalidate an attempted forced arbitration of an auto title loan default.

Judges and court commissioners could use the WCA to limit interest rates and defaults when it's warranted, a complicated subject under the WCA and one not all judges are familiar with. Doing so would let courts, and juries, determine the extent to which a customer truly understood the risks and rewards of such a loan, and allow protection of those who were taken advantage while letting the industry continue.

A better route might be to use some of the laws we already have, an amend them to indicate that judges, when appropriate, can reduce or eliminate interest rates and that one factor to consider in doing so is whether the interest rate is unconscionable.

Emily said...

Briane - First off, this legislation doesn't ban these types of loans, it simply places (what I think are reasonable) regulations on them.

I hear where you're coming from, but in the end I'd rather not have people getting taken advantage of in the first place, rather than waiting until the deed is done and the issue needs to go to court. Some people can't afford that sort of arbitration anyway, whereas the industry can mostly afford to soak those costs.

Shane - Traps like being so desperate to get quick cash that you fail to see the fine print that puts enormous interest rate percentages on your loan, then requires that it be paid back else face even steeper fines. Then not being able to make the payments on time, and needing to take out yet more loans to pay off old ones, accruing yet more interest and fees because of that, etc. etc. until the debt is so enormous that there's just no way for a person to dig themselves out of that hole.

Anonymous said...

Your comments Emily tell me that you know little about how these loans work. Their rates/terms are spelled out in very clear and easy to understand wording.

borrow $100 today, pay back $120 when you get paid. cant swing it when you get paid next then pay the $20 interest and roll it over til your next payday.

How is that a trap or predatory? Thats right, it was deemed not to be predatory but that doesnt stop the pols and media from using that word over and over. And i thought just the right wing used fear for gain...

-shane

JeffKursman said...

At a 36% APR, the total fee charges on a $100, two-week advance would be $1.38. Payday advance lenders could not cover the cost of originating a loan, let alone cover basic business expenses. Ultimately, a 36% APR cap would eliminate an affordable short-term credit choice for consumers.

Emily said...

Shane - What about people for whom $20 extra a month is completely out of their price range? Especially for those on fixed incomes, that kind of interest simply isn't feasible. They'll roll over and roll over until their debt equals more than they originally borrowed. Ask/look around, there are countless stories like this.

Jeff - Honestly, I'm of the opinion that payday loan stores should be put out of business, and reputable, well-regulated banks and credit unions should begin to/expand their short-term loan and micro financing offerings so that this crap can be avoided all together.

In the meantime, since it would be political suicide for someone to publicly suggest that we'd be better off without payday loan businesses, I think the rate cap is more than fair. I'd be very curious to see what kind of effect the 36% rate cap on loans made to military personnel had on their business models. Somehow I'm just not buying that it has/would completely destroy their business model.

Anonymous said...

Emily,

No short term loans are made to the military. Soldiers have to go to their Sergeants for "5 finger loans" just like before the payday loan stores opened up. Go into any payday loan store and tell them you are a soldier, they will deny you credit. And as you know, the "5 finger loans" cost much more and have harsh collection practices.

Emily said...

http://www.npr.org/templates/story/story.php?storyId=14853904

Anonymous said...

Emily said...
Shane - What about people for whom $20 extra a month is completely out of their price range? Especially for those on fixed incomes, that kind of interest simply isn't feasible. They'll roll over and roll over until their debt equals more than they originally borrowed. Ask/look around, there are countless stories like this.

emily,

The amount someone can borrow is based on verifiable income. I believe it was up to 50% of my bi-weekly income. To some people(me included) that would be nearly impossible, because of other expenses, to take out that much and be able to pay it back in 2 weeks plus interest. But for many people(me when i was single and childless)they can and do all the time. The catch is that you have to know what your limit is and what you can REALISTICALLY be able to pay back.
The example you site... if they cant spare the $20/month why did they accept a loan basically knowing they couldnt pay it back? Who's the fraud in that scenario? not the lender.
Do you realize that a lot of people use these places to avoid fees from their bank.

Ive used them for various reasons. Some good(needed to), some bad(wanted to) and i'd rather not lose my opportunities because other people dont borrow responsibly.

-shane

"Jeff" said...

I hesitate to post on this blog because of the "This post has been removed by a blog administrator" hammer that is being applied to some comments. I am about as left-wing as political beliefs come and believe in allowing open discussion.

That being said, I'll tell you my story. If you don't feel like reading then at the very least skip to the end.

I am a branch manager operating a payday loan store here in WI. I am not a lobbyist. I have no rehearsed lines. I am just a normal guy in my 20s with a family to support and a job in this economy where hundreds are losing jobs every day (and they ultimately come in to see me). I was skeptical when I took this job a year ago, knowing the stigma of "predatory loan stores," but after losing my job in another industry and submitting over 1000 resumes, I could continue to support my family with no job and my wife working part-time.

Over the last year I have seen both the good and the bad aspects that come with the business:
- I helped a family replace a sump-pump for their house when their basement flooded last year. I never saw them again.
- I helped a traveling salesman repair his car so he could drive to Chicago and keep his job. I never saw him again.
- I helped a child get treatment for Leukemia while her insurance battled over what and when they were going to pay. I helped her mother get back out of debt after defaulting on multiple other loans without affecting her credit score.

On the other hand, I have seen many customers just get themselves into trouble while not heeding my advice or ignoring my calls completely. My store alone has had over $30,000 in liquid assets vanish from people filing bankruptcy since the beginning of the year.

I agree there should be some restrictions on the system as it stands today. But what irks me is how these legislators are pinning the problem on the businesses themselves and calling my customers "victims". I do my best to assist my customers and constantly remind them that paying only their interest isn't getting them anywhere, and when they over-extend their income I try to help them back out.

I have a lot of points to make and would like to give you another side of the discussion, but don't want to clog your blog any more than I already have. If you're interested in an open discussion, let me know and I will email you my info.

And my most important point of this comment...
If you find yourself stuck in a loan you cannot pay back... let your check go to the bank and get returned NSF. The manager will work out a payment plan with you that will not incur any additional fees or interest (over 2 weeks). This will be far less than the interest payed over 3 months if you continue to make only interest payments!

Emily said...

Jeff - Thanks for posting your story. The only time you'll see "comment deleted by blog administrator" on here is if it was spam (in this case, it was link spam). So I hope you feel welcome to say what you want to say here, and I would certainly be interested to hear more. I don't have time at the moment for a more detailed response, but I wanted to say that at least.

Anonymous said...

Hi Emily,
My name is Phil Gokey (itango@hotmail.com)
Your "Curb their exploitation" article suggests we use reputable lenders...like banks! My bank does payday, or deposit advance, loans very readily. I think you should do a "The rest of the story" article on this subject. The charge at my bank varies, but for $400 advance for 4 days, they charge %800. Just who is reputable here?
Phil

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