When I heard that state Rep. Gordon Hintz, a Democrat from Oshkosh, was introducing a bill to cap the interest on payday loans at 36%, I was excited. Finally, I thought, someone is doing something about this unchecked industry.
Wisconsin's lack of regulation has led to annual interest rates of more than 500%, and too many stories of down-on-their-luck people unable to pay back their loans. That, in turn, leads to ever higher interest charges, which sometimes drive people into taking out new loans. It can be a sticky trap.
The 36% cap in Rep. Hintz's bill, AB 392, is based on a similar law enacted federally to protect members of the armed services, who, sadly, were disproportionately affected by payday loan rates. This seems like a reasonable limit for everyone.
Of course, that's not what the industry would have you believe. Make one negative remark about payday loan practices and the shills come out in force with well-polished lines, like the ones in response to my recent blog post.
Hintz's bill, one person insisted, "would destroy the industry [and] the payday loans are needed in some situations."
Capping interest rates at 36%, they said, would make it impossible for the lenders to stay in business. Never mind that this is higher than the original cap Wisconsin had on the books before the Legislature chucked it in 1995.
The defenders say these loans are typically meant to be paid back in just two weeks, so even 500% annual interest on a small loan for that period doesn't add up to much. But, as Rep. Hintz pointed out to me, "Reports show that about 50% of borrowers aren't able to pay it off in just two weeks, so then we're not talking about a short-term loan anymore."
And then I heard from a young man who manages a payday loan store in Wisconsin. He told me something that changed my thinking on this issue.
The young man, who for obvious reasons asked to remain unnamed, didn't think the rate cap was the best way to go. I was suspicious until he explained, "The issue with the industry is not necessarily the percentage rate of the loans, but the fact that Wisconsin has no regulation for the length of term."
The latter, he argued, would be far more useful in helping keep people out of trouble.
New Mexico, for example, has capped the duration of payday loans at 14 to 35 days, after which no additional interest can be charged. That state also limits loan amounts to 25% of the borrower's gross monthly income.
That's a reasonable restriction and one that would hold the payday loan industry accountable to its own talking points. If capping the interest rate at 36% is unreasonable because loans are only supposed to be short-term, then making sure those loans are short term shouldn't be an issue.
Wisconsin should take whatever reform it can get, and you know it won't come easy. Any regulation, including Rep. Hintz's bill, will be met with strong opposition and lots of lobbying dollars. (The industry spent $158,100 in just the last two legislative terms.)
The proliferation of payday-loan and check-cashing stores, plus the ever-rising number of people who find themselves in a spiral of debt because of them, are symptoms of our nation's greater financial woes.
Beyond proper regulation, we need to start educating vulnerable populations about using more reputable providers like banks and credit unions. In turn, those places should do more to offer reasonable micro-financing and short-term loans.
When the vulnerable are targeted for exploitation, the whole community suffers. Right now, our community is hurting, badly, and we need to do everything we can to address the problems caused by bad business practices.
Emily Mills is a local writer and musician. She blogs at www.lostalbatross.com.