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.

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)