Payday lenders back in business with looser regulations
By Patrick Marley of the Journal Sentinel
Updated Dec. 9, 2012
Madison – Payday lenders have wriggled out of state regulations that lawmakers put in place 2 years ago, in part because Republicans last year loosened some of those restrictions.
Many of the lenders have shifted from payday loans that were good for as little as two weeks to what they call installment loans – high-interest loans that don’t fall under payday lending regulations. Installment loans can have annual interest rates of 500% or more.
This is an industry that just kind of morphs depending on the law to regulate them, said Stacia Conneely, a lawyer with Legal Action of Wisconsin who helps people who get behind on high-interest loans.
In 2009 and 2010, Democrats who controlled the Legislature at the time had a fierce debate over payday loans, which were unregulated at the time. Some lawmakers wanted to cap interest rates at 36%, but others said that would put lenders out of business and advocated for regulations that didn’t go as far.
They ultimately reached a compromise in the spring of 2010 that Democrats praised as a way to keep low-income consumers from getting caught in endless debt. Then-Gov. Jim Doyle, a Democrat, made the bill tougher by using his partial veto powers to ban auto-title loans and broaden the definition of payday loans. Republicans took control of the statehouse less than a year later and softened the regulations so they were friendlier to lenders.
Even before the original law passed, lenders began changing the types of loans they made, according to Conneely.
It’s definitely a classic example of how interest groups counter to the public interest can distort and ultimately get something more amenable to them, said Rep. Gordon Hintz (D-Oshkosh).
Hintz spearheaded the effort to rein in payday loans in the Assembly in 2009 and 2010. He wanted to pass tougher measures, but was stymied by Senate Democrats.
Rather than giving out payday loans, many lenders are now offering installment loans. There are no limits on how much they can lend people or how many installment loans they can make to each customer. They do not have to check whether borrowers have the ability to repay the installment loans or enter them into a state database, as they do with payday loans, noted Peter Koneazny, a lawyer with the Legal Aid Society of Milwaukee, another group that assists people when they get behind on loans.
Barb Wolf, a vice president with Chicago-based PLS Financial Services, said her firm has offered installment loans for years in Wisconsin. She said some consumers prefer them because they require consistent payments. That contrasts with payday loans, which have balloon payments when they mature. Some borrowers repeatedly renew payday loans, causing 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 maintained those who take out loans from her company are very wise consumers who do not borrow more than they can afford.
Wolf said the ratio of installment loans to payday loans her firm offers had not changed with the new state regulations, but was unable to provide figures.
Conneely, the attorney who works with borrowers, said she had seen a steady increase in installment loans since lawmakers began debating loan regulations in 2009.
State records suggest many lenders are offering 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 had to be reported to the state, according to records maintained by the state Department of Financial Institutions.
Those outlets issued about 14,000 payday loans in October worth about $3.9 million. They charged borrowers about $862,000 in interest. On average, the loans were $285 and had interest of $63.
One of Conneely’s clients from Reedsburg first took out a payday loan several years ago, when he needed car repairs. He thought he would be able to pay off the loan in six to eight months, but kept falling behind.
He spoke to the Journal Sentinel on the condition that his name not be used because he is embarrassed about his financial situation. With Legal Action’s help, he sued the lender last year, arguing that the loan didn’t comply with the state regulations in effect at the time. The two sides disputed whether the loan – with an annual interest rate of more than 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 rapidly accruing. That’s been impossible to pay off because he makes less than $1,100 a month in Social Security disability income, the man said.
What it is now is basically legalized loan sharking, he said. When you can charge rates as high as they do, that’s criminal.
Until 2010, Wisconsin was the only state that did not regulate payday loans. After a long debate, Democrats who controlled the Legislature at the time passed a bill that limited where payday loan stores could locate and limited payday loans to $1,500 or 35% of monthly income, whichever is less. The legislation also said borrowers could have only one payday loan open at a time and could renew each one only once. Critics said borrowers got caught in an unending cycle of debt when they took out multiple loans or repeatedly rolled over a loan.
The law, which took effect in December 2010, established a state database for tracking payday loans. That was necessary to ensure that lenders didn’t give borrowers more than one payday loan at a time. It also gave state officials their first detailed information on how many payday loans were being given out.
As passed by lawmakers, the legislation defined payday loans as loans that were for 90 days or less and were secured with postdated checks or authorizations for electronic bank transfers. Doyle used his veto pen to strike the part of the definition that referred to 90 days – an action that put far more loans under the state regulations.
But Republican lawmakers and GOP Gov. Scott Walker put the 90 days back into the definition last year, and that made it easier for lenders to get around the rules, said Tom Feltner, director of financial services from the Consumer Federation of America, a consumer interest group based in Washington, D.C. Any loan that has a term of more than 90 days is not subject to the payday lending regulations.
That’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 one of Doyle’s partial vetoes banned loans secured by vehicles, which critics have said are particularly harsh because borrowers who default on them risk losing their means of getting to work. Republicans also reversed that veto last year, re-establishing the ability of lenders to make auto title loans.
The industry fought the regulations, sending 30 lobbyists to the Capitol and spending $669,000 on lobbying in 2009 alone. Even now, at least eight lobbyists are still registered with the state. PLS was the only lender that responded to the Journal Sentinel’s inquiries for this story.
Lenders have also spent heavily on Wisconsin campaigns . Officials with one title lending firm over the past year gave $24,000 to Assembly GOP candidates and nothing to Democratic candidates.
Religious groups and advocates for consumers, the poor and seniors lobbied the Legislature in 2009 and 2010 to impose a 36% cap on interest rates on all loans, but the cap couldn’t get through either house.
That’s the biggest opportunity the Legislature lost, said Representative-elect Mandela Barnes (D-Milwaukee). A lot of people were convinced to vote against the interests of the people they represent.
Koneazny said the installment loans are harmful to vulnerable people but said they have some features that are better than payday loans that were given before the legislation passed. The old payday loans could be rolled over repeatedly, locking people into paying high fees without ever making headway on the principal.
Installment loans, by contrast, amortize and thus have a firm end date.
But the loans are not a good deal compared with traditional loans. Koneazny provided a copy of one loan agreement from First Rate Financial in Milwaukee that had an annual interest rate of 398%. The $200 loan was to be paid back with 13 payments 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 total interest cost, Koneazny said. But he added that many of the people who accept such loans are unsophisticated and unable to understand the ramifications of such loans.
He said installment loans often have interest rates of 500% or 600%. He said he had one client who acquired a loan over the Internet that had an interest rate of 1,000%.