Wednesday, August 5, 2009

Kick predatory payday loans out of Wisconsin

I was very heartened to read the article in today's Capital Times detailing efforts by activists and state lawmakers (specifically Rep. Gordon Hintz, D-Oshkosh) to put the kibosh on predatory lending practices at payday loan businesses.

It is, in my opinion, one of Wisconsin's dirtiest not-so-secret truths that we currently have practically no regulations in place for these operations. When "the Legislature in 1995 repealed what was then an 18 percent interest rate cap on consumer loans," the payday loan business took off with a vengeance. Interest rates on these loans can now be as much as 525% (or more) a year. That is, simply put, absurd.

Hintz's legislation would "cap at 36 percent the rate on consumer loans of $5,000 or less," which is also the rate at which recent federal legislation limits loans made to military personnel (and which there is an effort underway to expand to all citizens). Further to this, we should be working to regulate the due dates placed on loans, as all too often borrowers are forced to roll over loans, thus accruing yet more interest, because they can't fully pay off the first one by the time their next paycheck rolls around. That's the ultimate trap.

This sort of regulation seems more than reasonable to me, but of course the lobbyists representing the payday loan industry have been quick to cry foul.

After all, we're talking about preventing them from fleecing the ever living crap out of people in already dire financial straits--which they seem to think is their God-given right to do.

It's because the industry has such deep pockets that legislation of this sort hasn't already been passed. That and lawmakers who are far too prone to being swayed by said deep pockets. They should all be ashamed of themselves. This is preying on the most vulnerable members of our society at some of its worst.

I won't argue that payday loans don't have a place in our society. They clearly serve a need. What we should be doing is encouraging more reputable banks and businesses to offer these sorts of micro-loans, though, as opposed to letting these shady operations run rampant and unregulated.

Take, for example, the credit union programs detailed in the article:
Credit unions are trying to meet the need for small, short-term loans, says Christine Henzig, director of communications for the Wisconsin Credit Union League. A survey last year found that 60 member credit unions offered loans that are, in effect, alternatives to payday loans -- although they are not always marketed that way. And a national initiative assists local credit unions in developing products to help their members improve creditworthiness and build wealth.
UW Credit Union in Madison is pleased with the response to its Paycheck Advance program, which lent more than $21,000 in 51 loans to members since its launch in June. Members can borrow up to $500 at 21.75 percent interest and must pay back a minimum $50 each month.
This sort of thing just makes sense. Much like the Kiva model of micro-financing for small business owners in developing countries, we would do well to offer a similar model right here in the good ol' United States. It addresses both the sky-high interest rates that often lead to further financial trouble as opposed to doing any good for those in need, and also begins to point those folks in a better direction for managing their money in the first place.

We are few of us financial wizards, and when things get really tough, we often end up feeling like there are no alternatives. That has to change.

We need to realize that this sort of problem effects us all, too. Not only do you never know when the proverbial financial shit might hit the fan for you, but it also behooves us, as a society, to make sure that the most vulnerable among us are not taken advantage of in this way.

I can think of no good reason not to regulate the payday loan business. Ultimately, interest rate caps and regulation of the due dates on loans are just the start of what needs to be done. But they're an important start--crucial, even. We need to hold our representatives accountable to make sure this legislation is well-crafted, with actual teeth, and then passed into law. And soon.

(photo by taberandrew on Flickr)


Susie said...

Regulation of the Payday industry is needed, I agree. However, a 36 percent cap on payday loans would destroy the industry, and as you said, the payday loans are needed in some situations.

A 36 percent cap would mean the lender would receive $1.38 per two-week loan, which is not enough to cover employee payroll, benefits or day-to-day operating costs, and thus the lenders would disappear.

People in financial emergencies need to keep their limited number of options, and Hintz's proposed cap would take away a vital source of credit for those in tight monetary situations.

For more information, check out:

Emily said...

Then what level of cap do you propose? You must admit that the rates now are absolutely criminal, and they need to be capped somewhere lower than the current norm.

Shane said...

Isnt it disengenous to quote yearly interest rates on a 2 week loan?
I know people that could have lost their car, job, apartment, etc... had these places not existed.
The people who get in trouble are the ones that over borrow or get loans for the wrong reasons or because they realize that stiffing 1 more place isnt going to affect an already bad credit report so they choose to let it go.

Elry said...

I honestly think the solution has to come from conventional financial institutions offering real alternatives to these type of loans.

Let's face it, right now to qualify for a line of credit at any bank, you need a credit score of 700 and keep a Debt to Income ratio of at least 45% and they will not do a loan for less than $5,000. If you don't qualify for this loan the bank will offer "courtesy overdraft" at $30+ per ocurrence no matter the amount! Which is far more expensive than 500%APR

Unless there are more efforts like the one that UW CU has, we can close down these PD loan stores tomorrow but we will not solve the need that thousands of Americans have for these micro-loans.

AF said...

Nice to see that the payday lobbyists (over twenty in the state of WI alone) have found this blog post and posted their talking points all over it. Rep. Hintz's bill PROTECTS consumers from predatory lending practices and if the byproduct of protecting consumers is to make business difficult for a bunch of out of state predatory lending companies that prey on the less fortunate among us, then so be it. How can anyone defend it? No one needs predatory lending and no one ever has. If payday lenders can't give people access to credit at less than 500% interest rates, then they need a new business model.

Elry said...

AF, I agree that predatory lending has to come to an end. More efforts are necessary to protect the consumer, one way of doing it is by creating new alternatives.

I am not pro payday stores, but I am seriously concerned about what the solution and answers are for all these people. This include credit cards, and current regulation on banking fees.

As a society we are quick to point at what is wrong. Let's face it there is a huge need out there for people living paycheck to paycheck needing some extra money once a while with no other alternative to put it on a card, or overdraft their checking account or even take out a microloan.

Like Deb Neubauer said on the article published yesterday, this legislation helps, but it is only like putting a bandaid on a more serious problem.

Anonymous said...

it *is* regulated, just not regulated to your liking. its dishonest to call it "unregulated"

Emily said...

I'm sorry, allow me to be more clear: The interest rates payday loan companies are allowed to charge are not regulated in Wisconsin. That's a pretty major problem.

Shane said...

susie is clearly working for the industry, but is open about that fact. Why i assume others are? To try and make our views less valid?

Why quote a yearly rate when these are 2 week loans?

In my experience these types of loans were much less harsh than my bank was.

Anonymous said...

Payday loans serve a need alright. To make a bad situation even worse.

What a joke.

emilywinkle said...

Consider the difference between the rates of pay for hotel rooms and actually renting an apartment. Hotels are expensive over a year because they are only created for short-term rents, just as payday loans are only created for short-term uses.

Also consider, other common short-term credit fees expressed in terms of an APR: $100 payday advance = $15 fee (391% APR); $100 bounced check = $54 (1409%); $100 credit card balance with late fee = $37 (965%); $100 utility bill with late/reconnect fees = $46 (1203%). It's quite obvious that payday loans are a viable alternative when faced with short-term financial problems.

Emily said...

Sorry Emily (and the rest of the industry lobbyists vising this site), your application for credit has been denied.

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TrentonKnew said...

In my observation, as a regular guy, I think the main "lobbyists" AGAINST the payday loan industry are single interest groups who have a financial interest in "conventional financial institutions" who themselves caused a recession with their predatory "sub-prime" mortgages and adjustable APR's. But I agree with Em Winkle and Shane. Talking about Annual Interest on a loan that only lasts for less than four percent of a year is to me like complaining to the electric company because you momentarily only have 115 volts on your 120 outlet.

The REAL predators are all the accountants and mathematicians working at the bank, working to figure out how to MAXIMIZE late fees, overdraft fees, interest rates, and also find ways to trick you into making a credit card payment late. Maybe if banks were MORE on the side of the customer and servicing their needs, we wouldn't need the payday loan industry. But since they rape us, they are no better anyway.

Anonymous said...

I really hope that those government officials that take money from the Payday lobbyist will be able to sleep at night...It should open some eyes on why these Payday loan stores are spending so much money in contributions to Wisconsin political figures. Its sad....

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