Payday lenders resume operations with looser regulations
Madison – Payday lenders have escaped state regulations lawmakers put in place 2.5 years ago, in part because Republicans relaxed some of those restrictions last year.
Many lenders have gone from payday loans that were good for as little as two weeks to what they call installment loans – high interest loans that do not fall under payday loan regulations. Installment loans can have annual interest rates of 500% or more.
“It’s an industry that sort of transforms itself according to the law to regulate them,” said Stacia Conneely, an attorney with Legal Action of Wisconsin who helps people who fall behind on high interest loans.
In 2009 and 2010, the Democrats who controlled the Legislature at the time had a heated debate over payday loans, which were unregulated at the time. Some lawmakers wanted to cap interest rates at 36%, but others said it would bankrupt lenders and argued for regulations that didn’t go that far.
They finally reached a compromise in the spring of 2010, which Democrats hailed as a way to keep low-income consumers from endless debt. Then-Gov. Jim Doyle, a Democrat, made the bill harder using its partial veto powers to ban auto title lending and expand the definition of payday loans. Republicans took control of the state house less than a year later and relaxed the regulations to be more friendly with lenders.
Even before the initial law was passed, lenders began to change the types of loans they made, according to Conneely.
“This is certainly a classic example of how interest groups contrary to the public interest can distort and ultimately achieve something more favorable for them,” said Representative Gordon Hintz (D-Oshkosh).
Hintz spearheaded efforts to curb Assembly payday lending in 2009 and 2010. He wanted to pass tougher measures, but was thwarted by Senate Democrats.
Rather than providing payday loans, many lenders are now offering installment loans. There is no limit to how much they can lend to people or how many installment loans they can give to each client. They don’t have to check whether borrowers have the ability to repay installment loans or enter them into a state database, as they do with payday loans, noted Peter Koneazny, an attorney at the Legal Aid Society of Milwaukee, another group that helps people. when they are behind on loans.
Barb Wolf, vice president of Chicago-based PLS Financial Services, said her company had offered installment loans for years in Wisconsin. She said some consumers prefer them because they demand consistent payments. This contrasts with payday loans, which have lump sum payments when they come due. Some borrowers repeatedly renew their payday loans, forcing them to pay large fees without ever reducing the principal.
“You know what you’re going to pay” with installment loans, Wolf said. “When it’s done, it’s done.”
She argued that those who take out loans from her business are “very savvy consumers” who do not borrow more than they can afford.
Wolf said the relationship between installment loans and payday loans offered by his company had not changed with the new state regulations, but was unable to provide numbers.
Conneely, the lawyer who works with borrowers, said she has seen a steady increase in installment loans since lawmakers began debating loan regulations in 2009.
State records suggest that many lenders offer something other than payday loans. As of October, there were 389 outlets in Wisconsin licensed to make payday loans. But only about half of them – 198 – made loans that qualified as payday loans and needed to be reported to the state, according to records kept by the state’s Department of Financial Institutions.
These outlets issued about 14,000 payday loans in October worth about $ 3.9 million. They charged the borrowers about $ 862,000 in interest. On average, the loans were $ 285 and bore interest at $ 63.
One of Conneely’s clients from Reedsburg first took out a payday loan several years ago when he needed a car repair. He thought he would be able to repay the loan in six to eight months, but continued to fall behind.
He contacted Journal Sentinel on the condition that his name not be used because he is embarrassed by his financial situation. With the help of Legal Action, he sued the lender last year, arguing that the loan did not comply with state regulations in effect at the time. Both parties disputed whether the loan – with an annual interest rate of over 400% – was a payday loan or an installment loan. The man, 58, lost the case and is appealing.
He owes about $ 1,950, with interest accumulating quickly. This has been impossible to repay as he earns less than $ 1,100 a month in Social Security disability income, the man said.
“What it is now is essentially legalized loan sharking,” he said. “When you can charge rates as high as they are, it’s criminal.”
Until 2010, Wisconsin was the only state not to regulate payday loans. After much debate, Democrats who controlled the legislature at the time passed a bill that limited the location of payday loan stores and capped payday loans to $ 1,500 or 35% of monthly income. , whichever is less. The legislation also stated that borrowers could only have one payday loan open at a time and could only renew each one once. Critics said borrowers were caught in a never-ending cycle of debt when they took out multiple loans or repeatedly renewed a loan.
The law, which came into force in December 2010, created a state database for tracking payday loans. This was necessary to ensure that lenders do not grant borrowers more than one payday loan at a time. He also gave state officials their first detailed information on the number of payday loans granted.
As passed by lawmakers, the law defined payday loans as loans with a term of 90 days or less and secured by post-dated checks or electronic bank transfer authorizations. Doyle used his veto pen to remove the part of the definition that referred to 90 days – an action that made many more loans subject to state regulations.
But Republican lawmakers and GOP Governor Scott Walker put the 90 days back in the definition last year, making it easier for lenders to bend the rules, said Tom Feltner, director of financial services for the Consumer Federation. of America, a consumer interest group based in Washington, DC Any loan with a term of more than 90 days is not subject to payday loan regulations.
“It’s a signal to the industry that the best way to get around the restrictions is to make a loan of 91 days or more,” Feltner said.
Another of Doyle’s partial veto bans vehicle-backed loans, which critics say are particularly harsh because borrowers who don’t honor them risk losing their means to get to work. Republicans also reversed that veto last year, restoring the ability of lenders to provide auto title loans.
The industry has fought regulation, sending 30 lobbyists to Capitol Hill and spending $ 669,000 on lobbying in 2009. Even now, at least eight lobbyists are still registered with the state. PLS was the only lender who responded to Journal Sentinel’s inquiries for this story.
Lenders have also spent a lot on Wisconsin campaigns . Officials at a securities lending company over the past year have given $ 24,000 to Assembly GOP candidates and nothing to Democratic candidates.
Faith groups and advocates for consumers, the poor and the elderly lobbied the legislature in 2009 and 2010 to impose a 36% cap on interest rates on all loans, but the cap could not go through neither of the two houses.
“This is the biggest opportunity the Legislature has lost,” said Representative-elect Mandela Barnes (D-Milwaukee). “A lot of people have been convinced to vote against the interests of the people they represent.”
Koneazny said installment loans were detrimental to vulnerable people, but had some better characteristics than payday loans given before the legislation was passed. Old payday loans could be renewed over and over, forcing people to pay high fees without ever advancing on principal.
Installment loans, on the other hand, amortize and therefore have a firm end date.
But the loans are not a good deal compared to traditional loans. Koneazny provided a copy of a loan agreement from First Rate Financial to Milwaukee which had an annual interest rate of 398%. The $ 200 loan was to be repaid in 13 installments over a year of $ 66.28 – costing the borrower $ 661.64 in interest.
The terms of installment loans are also clearer than payday loans because they tell borrowers the annual percentage rate and the total cost of interest, Koneazny said. But he added that many people who accept such loans are unsophisticated and unable to understand the ramifications of these loans.
He said installment loans often have interest rates of 500% or 600%. He said he had a client who took out a loan over the Internet with an interest rate of 1000%.