Wisconsin should ban (for-profit) payday lenders.
What’s the Problem Addressed?
“Payday” loans are small cash loans for those who cannot meet urgent expenses. Allegedly, they’re for unforeseen expenses, and quickly repaid from the job that the lender needs to have. In fact, they are often used for ordinary expenses (rent, utility bills, etc.), and carry such high-interest rates that borrowers often start chasing their tail on debt: borrowing more from lenders to pay back the previous loan, and falling further into debt, and often insolvency. Wisconsin encourages this sort of irresponsible lending. It is one of the only eight states in the country that put no limit on interest charges by payday lenders.
Payday lenders here have taken full advantage of this license to charge however much their often desperate customers will tolerate. According to the state’s Department of Financial Institutions, the average interest rate on payday loans in Wisconsin was 565%. This means that on a loan of $400, the average consumer would be liable for $556 on interest alone (not counting repayment of the loan capital itself, and not counting the lender’s many fees) over just three months![note]Bowden, B. (10 June 2016), “No relief from Wisconsin’s 565 percent payday loan interest under new rules”, Wisconsin Public Radio/Wisconsin Center for Investigative Journalism https://www.wisconsinwatch.org/2016/06/no-relief-from-wisconsins-565-percent-payday-loan-interest-under-new-rules/[/note] To add insult to injury, these numbers are likely underreported. In 2011, the Wisconsin legislature changed the definition of payday loans. High-interest loans that have a time span in excess of 90 days are now deemed “installment loans” and they are not subject to any state payday loan laws.
Nationally, it’s pretty clear that payday lenders are a scourge against the poor and middle class. The average American family is now spending over $2,400 a year (so, $200 a month) on such “alternative banking services.” That amount is higher than the average family’s budget for food. It’s also nearly ten times the average of $26 a month that those filing for bankruptcy need to avoid it.[note] U.S. Postal Service (2014), Providing Non-Bank Financial Services for the Underserved, ii, 14 http://www.uspsoig.gov/sites/default/files/document-library-files/2014/rarc-wp-14-007.pdf, cited in Baradaran, M. (2014), “It’s Time for Postal Banking,” Harvard Law Review 127: 165-175, at 167 https://harvardlawreview.org/wp-content/uploads/pdfs/forvol127_baradaran.pdf[/note]
How OWR’s Proposal Addresses It
OWR’s proposal would follow Georgia’s lead by prohibiting payday loans under the racketeering laws. The one difference would be Wisconsin would have a lower usury cap. Georgia allows 60% per year. This is too high. Wisconsin should have a maximum interest rate of 15% plus the yield rate for ten-year treasury bonds.
Using criminal statutes may be aggressive, but it is needed to curb the abuses in the payday lending industry. Payday lenders may be willing to risk civil litigation, but they probably will not want to risk criminal prosecution.
Who Else is Doing This?
Connecticut, Maryland, Massachusetts, Pennsylvania, Vermont, and West Virginia have never authorized payday lending. The District of Columbia, Arizona, and North Carolina – all jurisdictions where the practice was once common – have recently abandoned legal sanction of it. Georgia uses its racketeering laws to prohibit common types of payday loans. In total, eighteen states and the District of Columbia either ban payday lending or impose severe caps on the amount of interest that can be charged.
Other states put limits on permissible interest rates changed. For example, New Jersey and New York use their criminal statutes to ban loans with rates exceeding 30% and 25%; Arkansas has a maximum rate of interest at 17%; New Hampshire and Montana cap permitted rates at 36% per year.[note] Consumer Federation of America (accessed 17 April 2018), PayDay Loan Consumer Information: Legal Status of Payday Loans by State http://www.paydayloaninfo.org/state-information[/note]
Why not Wisconsin?
There is nothing positive about payday lending. People needing emergency loans should be steered towards social workers who can help them. Payday lending is nothing more than legalized loan sharking. It needs to be banned in Wisconsin.