Legislation would limit interest charged by payday and auto title lenders
Patricia’s story isn’t unique,but it’s still shocking.
She was moving and needed some extra cash, so she took out two short-term “payday loans,” totaling $550 plus $182 in upfront fees.
When she couldn’t repay the loan the following month, Patricia entered into the “debt trap.” She has rolled over that $550 loan 18 times and has paid $2,200 on it by keeping up with her monthly minimum payments. But not one penny of that has gone toward the principal. The entire $2,200 has gone toward interest, period.
Patricia is just one of thousands of Wisconsin residents who have gotten caught up in the snare of predatory lenders who operate storefront payday loan, check cashing, auto title or cash advance businesses. In 2005 alone, Wisconsin consumers paid $124 million in fees to payday lenders. In 2004, $500 million worth of loans were made; 80% of that revenue left the state, since most establishments are owned by out-of-state investors.
Even though the city of Milwaukee attempted to zone them out of existence so that no new operations can set up shop, there are still 530 licensed payday lenders in the state. They typically target low-income residents who live paycheck to paycheck and are the most vulnerable to downturns in the economy and one-time budget-busting expenses, such as moving, major auto repairs or health crises.
Incredibly, Wisconsin is the only state in the nation that does not limit the amount of interest that a payday lender can chargeand the typical annual percentage rate is 525%, or $20 for every $100 borrowed for a two-week loan.
But state lawmakers, re-introducing legislation written by the Assembly majority leader, state Rep. Tom Nelson (D- Kaukauna), are seeking to cap annual interest charged by payday lenders at 36%. That’s the rate Congress selected for payday lenders that do business with members of the military and their families. Nelson and his supporters say that if it’s good enough for the military, it’s good enough for Wisconsin residents.
“There is no bigger consumer protection issue than taking to task the predatory payday lending, auto title and check-cashing operations that plague our communities,” Nelson said in Milwaukee last week, when the Predatory Lending Consumer Protection Act was announced.
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Milwaukee-area Reps. Pedro Colon, David Cullen, Fred Kessler, Jon Richards, Cory Mason, Sandra Pasch, Christine Sinicki, John Steinbrink and Leon Young have already signed onto the bill. In the state Senate, Spencer Coggs and Tim Carpenter have pledged their support.
Lenders Seek Profits Over Consumer Protection
State Rep. Gordon Hintz (D-Oshkosh), who is working with Rep. Nelson on the legislation, said that the current business model is “un-American” because it “sets people up to fail.” “If everyone paid off their loan in two weeks, there wouldn’t be an industry,” Hintz said.
But lobbyist Erin Krueger, of the Wisconsin Deferred Deposit Association, said the recommended 36% interest cap “effectively puts the industry out of business” because “the interest cap would not allow them to lend and make any sort of business out of it.”
Krueger said that stories like Patricia’s aren’t typical, but that she would have been worse off with other alternatives, like bouncing checks or taking out an unregulated Internet loan. “We look at our product as a short-term lending option for consumers, the vast majority of which fare very well with it,” Krueger said. “To deny that access to a choice is something we’re very concerned about.”
In a press release, George Klaetsch of the Wisconsin Coalition for Consumer Choice argued that Wisconsin needs more payday lenders, not more restrictions on them. “Not only do we oppose any effort to restrict choices on products and services available to Wisconsin citizens, we believe now is the time to increase and improve options for Wisconsin consumers, not decrease them or make them worse,” Klaetsch wrote.
State Rep. Jon Richards (D-Milwaukee) said the legislation was necessary to protect the state’s most economically vulnerable population. But he predicted that the fight in the state Legislature would be tough.
“They have a huge lobbying effort,” Richards said. “Of course they’re going to work like hell to make sure that Wisconsin doesn’t have more regulations. They’re making a lot of money off of us.”
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