Saturday, December 19, 2009

Chumming for Payday Lenders. Sharks found in West Bend.

Hi everyone,

We now have 8 payday lenders in our little town of 30,000.

Loan sharking is illegal, but loan shark lobbyists, apparently, aren't as effective at manipulating legislation.

Saturday's column

Sharks found in city

If you loan money, at usurious rates, to people down on their luck who can’t pay it back, which forces them to take out yet another loan to cover the first one and, thus, leap headfirst into a death spiral of debt – and you do it illegally – you’re called a loan shark. If you do it legally, you’re called a payday lender. It’s time to see payday lenders for what they really are.

The Payday Loan industry says they’re only performing a service for people down on their luck. The rules governing these transactions are clearly posted and the industry claims that everyone who takes out one of these loans understands exactly much interest they’re paying.

It works like this: let’s say you get strapped for cash a week before payday. You can walk into a local storefront and get a loan for the amount of your next paycheck. Sounds handy, right? Sure. Let’s say your paycheck is for $350. You go down to the payday lender with a postdated personal check. You fill in some paperwork, pay a fee of (on average) $60, and walk out with $290. So far so good. $60 is a big chunk of your paycheck, but of you need the cash you’re willing to take the hit.

In a perfect world you'd get your real paycheck a week later and pay off the loan.

The industry makes it’s big money by betting on imperfection.

What typically happens next? People run out of money before their next check comes in so they need to take out another payday loan -- in which case they’re now trapped paying $60 every couple of weeks to float what is, in effect, a perpetual advance. Worse yet, let’s say they need some of their real paycheck for rent or food. The check given to the payday lender now bounces: bad for the borrower but great for the lender. The lender now charges you a late fee. To avoid defaulting, the borrower takes out another loan and pays another $60 fee. And so on.

The Center for Responsible Lending calls this “the debt trap” of payday lending.

Payday lenders say publicly that they provide short term loans to help people get over short term financial difficulties, but the unspoken reality is that 90 percent of their profit comes from lenders trapped in long term debt – and at rates that would make real loan sharks blush.

But why on earth would anyone get into this situation? The easy explanation would be something out of 1950’s detective movie: gambling or drugs. The truth is that most payday borrowers are usually folks at the bottom of the income ladder: the working poor and those on social security-- people living close to the edge who are desperate enough to try anything. According to Wisconsin’s Department of Financial Institutions, that desperation usually ends up costing borrowers, on average, an annual percentage rate of 542.2%.

Once there’s blood in the water, more sharks always start circling. In 1995, there were two payday lenders in Wisconsin. By August 2009, there were over 500 -- 64% of which, by the way, are owned by out of state interests. West Bend, population 30,000, now has eight.

Payday lending is being opposed across the country by groups including Wisconsinites for Responsible Lending, the Consumer Federation of America, the National Consumer Law Center, and the Center for Responsible Lending. Closer to home Rep. Gordon Hintz (D-Oshkosh) has a bill to limit interest rates to 36 percent. He’s even drawn support from across the political spectrum, from Lena Taylor to our own Glenn Grothman. But it’s an up hill battle: the Wisconsin Democracy Campaign projects that the payday loan industry is spending as much as $500,000 on over two dozen lobbyists to stop this bill. The WDC reports that the payday loan industry gave a record $140,200 to the governor and to legislative candidates in 2008.

Greed is an equal opportunity employer: six of the top seven campaign contribution recipients were Democrats. I guess we’ll find out how many votes payday loan money can buy.

John C. Bersia in his 2000 Pulitzer Prize winning editorial, coined the phrase “legal loan sharks” to describe payday lenders. Calling payday lenders “legal loan sharks” is an obvious comparison, but it does a disservice to real loan sharks. Real loan sharks only charge, on average, 150%. More importantly, real loan sharks are often willing to negotiate about repayment. Not so with the legal variety.

Eleven states have already begun to reel in these predators. Its’ time for Wisconsin to join them.


ps. This is a typo-free version of the column that appeared in the paper. Grading finals has a price.


Kevin Scheunemann said...


I agree with is loan sharking. If a bank did this, they would be hauled in front of numerous state and federal regulatory agencies and, at the very least, have its bank charter yanked.

This Payday Loan company issue creates an unbalanced financial services marketplace.

There is an easy solution: Pass legislation prohibiting the use of WI courtrooms for collection of broken payday loan contracts from Payday Loan companies.

Courts should not be put in the position of enforcing contracts that violate the Wisconsin Consumer Act. (Currently, its hard for consumers to articulate their rights under the Act, so unless they hire a lawyer, they tend to waive their rights as a result of Payday Loan lawsuits.)

This would get rid of profiting on the payday loan "imperfection issue". Prohibiting court collection of defaulted payday loan contracts would take away these companies incentives to profit by using the WI court system!

After all, would we allow the mob to enforce broken, and illegal, finance charge contracts in the court system?

Unfortunately, Democrats are being typical Democrats, they are being bought off on this issue.

This is precisely why bigger government is dangerous...government is bought off by those with the resources to influence.

Glad to see you finally wrote something critical of Democrats.

Kevin Scheunemann said...

And another thing...

You complimented Glen Grothman again.

First Medical Marijuana and now payday lending issues...

Does this call for another group hug?

I'm still willing to offer you a free USPS stamp for your check to the Grothman campaign.

I'll even throw in the envelope.

jkursman said...

Are all banks, credit unions, mortgage lenders, credit card companies and other financial instituions "loan sharks" too...?

By biblical definition, usury is the practice of charging any interest whatsover. Guess what? Restrict "usury" and no one can make any loans!

Banks and credit unions charge fees five time those of payday lenders for "overdraft protection"; an avg. of $27 in fees on an avg. overdraft of $36 according to a FDIC 2008 study. That's $0.75 per $1.00 loaned for 3-4 days vs. $0.15 per $1.00 loaned for up to 14 days by a payday lender.

Who's really the shark???

Mpeterson said...

Don't get me started! :^)

I wanted to keep the issue close to home, but the real loan sharks these days are the credit card companies.

There's a new scam the banks are running too, in which they don't alert you -- right away -- when you go over your account balance on debit cards. They add on a finance charge for every charge that goes over. Tricky buggers.

But like I said in the column, to call them loan sharks does a disservice to real loan sharks who are, with a bit of begging, willing to negotiate repayment.

Kevin Scheunemann said...

I agree credit card companies are loan sharks too!

That's why I don't consider the big credit card institutions as "banks", they are legalized gangsters, protected by Congress in exchange for protection money via campaign donations.

Mpeterson said...

I can't believe you're agreeing with me that business controlling the government might not be good for the country... everything else you've posted suggests you believe the complete opposite.

Did Marley shake his chains at you last night or something?