Wisconsin data show that payday loans have declined significantly since a bill aimed at curbing predatory lending was signed into law by former Gov. Jim Doyle in 2010.
In the year the law was enacted, 460 lenders provided over 1.15 million loans for a value of $482 million. The following year, the number of lenders dropped to 423 and the number of total loans had decreased by more than three-quarters, to 255,117, worth a total of $76.6 million. In 2012 that number dropped again to 201,467 loans for a total of $58 million.
So does that mean that people are no longer paying exorbitant interest rates on loans to get them out of a pinch?
Hardly, say experts. Rather than demonstrating the strength of the law, the data merely reveals the ease with which payday loan operators are exploiting loopholes that Republicans added to the law when they took over control of the Legislature in 2011.
The most obvious loophole changed the definition of a “payday loan.” The law Doyle signed defined it as any loan secured by providing the creditor a post-dated check or the ability to make an electronic funds transfer in the event of default. But the language later approved by Gov. Scott Walker in the 2011 budget changed the definition to include only loans that were made for a period of less than 90 days.
As a result, many high-interest loans are not subject to the regulations spelled out in the law signed by Doyle. The restrictions limited the number of loans a payday lender may offer to a customer to pay off the original debt and limited loans to a maximum of either $1500 or 35 percent of the customer’s gross monthly income. Contrary to the wishes of many consumer advocates, the law did not include an interest rate cap on the original loan, but it did establish a cap of 2.75 percent of interest that can be charged on the amount a customer has failed to pay by the time the loan is due.
“It would have been a good law,” says Bob Anderson, a consumer protection attorney for Legal Action Wisconsin who lobbied for payday lending reform during the 2009-2010 legislative session, when Democrats were in control of the Legislature.
That any law passed was a great triumph over the payday loan lobbyists who swarmed the Capitol and flooded Democratic campaign coffers with contributions, in one case striking up a romantic relationship with then-Assembly Speaker Mike Sheridan. The Janesville representative admitted to dating a payday loan industry lobbyist.
“There was clearly an influence of the payday lobby on Democrats, but they still passed a law,” recalls Anderson.
The law they passed wasn’t that strong, and initially included the 90-day definition for payday loans.
However, Doyle, using his partial-veto power, eliminated the 90 day definition because he recognized the loophole it created. He also used his veto pen to ban auto title loans – short-term, high-interest loans secured by putting one’s car on the line – which Republicans also reversed the following year.
According to Anderson, Republicans justified the changes by reasoning that they were just rolling back Doyle’s vetoes so that the law would reflect the “original intent of the Legislature.”
Whatever the explanation, the changes definitely reflected the intent of the nine payday lending companies that spent just under $900,000 lobbying Republicans to make the changes during the 2011-2012 session. They also funneled tens of thousands of dollars into GOP campaigns.
“When you try to regulate these industries you have to put very tight definitions on what you're regulating,” says Justin Sydnor, a UW-Madison professor of actuarial science and risk management who has studied national payday loan trends. “There’s a lot of financial innovation (to escape regulations).”
State Rep. Gordon Hintz, D-Oshkosh, the lead proponent of payday loan reform when Democrats controlled the legislature, says that payday lenders are now largely using longer term installment loans.
“(Lenders) can steer you towards essentially what you need, which is a totally unregulated product,” he says.
As a result, he suggests, lenders are largely free to continue the practices that defined the pre-2010 payday loan era. They give out high-interest loans and when customers can’t make the payments, they are encouraged to “roll over” the loan and borrow more money from the lender to settle their outstanding debt.
While the data suggest that many payday lenders made changes to the terms of the loans they offer to escape regulations, there are still hundreds of lenders who are making loans that fall under the new “payday” definition and are subject to the new rules.
Peggy Moede, a lobbyist for three payday lending companies, says it is not yet clear what effect the law has had on payday lenders, but she suggests that consumers are opting for “fully amortized” loans that allow them to pay off the principal gradually, rather than in a lump payment, which is often the case for traditional payday loans.
Those taking out traditional payday loans still struggle to pay off their debt. Less than half pay off the loans by the maturity date and a third of all debtors roll over their loan, meaning they take out an additional loan to pay off the original debt.
According to Sydnor, the situation actually appears much worse in other states, such as Texas, where payday lending is completely unregulated and only 30 percent of customers pay their debts off in time.
But even that statistic might be the result of a narrow, state-specific definition of what constitutes a “rollover.” Loans are only referred to as rollovers if the customer takes out a new loan within 24 hours of the due date of the original loan. Sydnor says similar laws in other states masks the extent of payday lending occurring.
“You observe substantial numbers of people getting loans initiated just after the 24-hour window,” he says. “From the information we have it is difficult to know how much of that sort of behavior could be going on in Wisconsin.”
Moede, the payday lobbyist, says the Wisconsin law includes "some of the strongest consumer protections in the country." She points to the rollover restrictions and the $1500 loan limit.
Asked whether she believes current regulations are too burdensome on the industry, she says she is waiting to see what effect they will have in coming years.
"I would like us to live under the current regulations and see exactly how we operate under them," she says. "I think they’re good for the consumer and still allow for a free and open marketplace."
Hintz, however, believes the status quo does little to prevent low-income Wisconsinites from getting ripped off by usurious lenders.
"(Payday lenders) are doing just fine right now," he said recently. "While they are fulfilling the letter of the law, they're clearly not meeting the spirit of the law."