In 2014, hunger drove Michelle Warne of Green Bay to take out a loan from a local Check ‘n Go. “I didn’t have any food in the house at all,” she said. “I could not any more.”
Over the next two years, the retiree repaid this loan. But she took out a second loan, which she did not fully repay. This led to more borrowing earlier this year – $ 401 – plus $ 338 to pay off the outstanding balance. According to his loan statement of truth, repaying that $ 740 will cost Warne $ 983 in interest and fees over 18 months.
Warne’s annual interest rate on his so-called installment loan was 143%. This is a relatively low rate compared to payday loans, or small amounts of money borrowed at high interest rates for 90 days or less.
In 2015, the average annual interest rate on these types of loans in Wisconsin was nearly four times as high: 565%, according to the State Department of Financial Institutions. A consumer borrowing $ 400 at this rate would pay $ 556 in interest only for about three months. There might also be additional charges.
Wisconsin is one of eight states that do not have an annual interest limit for payday loans; the others are Nevada, Utah, Delaware, Ohio, Idaho, South Dakota, and Texas. Payday loan reforms proposed last week by the Federal Bureau of Consumer Financial Protection would not affect maximum interest rates, which can be set by states but not by the CFPB, the federal agency responsible for ensure equity of borrowing for consumers.
“We need better laws,” Warne said. “Because when they have something like that, they will take advantage of whoever is poor.”
Warne has never applied for a standard personal loan, although some banks and credit unions offer them at a fraction of the interest rate she paid. She was convinced a bank would not lend her, she said, because her only income is her Social Security pension.
“They wouldn’t give me a loan,” Warne said. “No one would.”
According to DFI annual reports, 255,177 payday loans were made in the state in 2011. Since then, the numbers have steadily declined: in 2015, only 93,740 loans were made.
But the figures after 2011 probably underestimate the volume of short-term and high-interest borrowing. This is because of a change in the state payday loan law which means fewer of these loans are reported to the state, former DFI secretary Peter Bildsten said.
In 2011, Republican state lawmakers and Governor Scott Walker changed the definition of payday loans to only include those made for 90 days or less. High interest loans of 91 days or more – often referred to as installment loans – are not subject to state payday loan laws.
Because of this gap, Bildsten said, “The data we need to collect at the FDHA and then report annually to the Legislature is almost irrelevant.”
State Representative Gordon Hintz, D-Oshkosh, agreed. The DFI’s annual report, he said, “seriously underestimates the volume of loans.”
Hintz, a member of the Assembly’s finance committee, said it is likely that many borrowers are in fact taking out installment loans that go unreported to the state. Payday lenders can offer both short term payday loans and longer term loans which can also come with high interest and fees.
“If you go to a payday loan store, there’s a sign in the window that says ‘payday loan’,” Hintz said. “But the reality is, if you need more than $ 200 or $ 250, they’re going to point you to what really is an installment loan.”
There are probably “thousands” of high-interest installment loans that are issued but go unreported, said Stacia Conneely, a consumer lawyer with Legal Action of Wisconsin, which provides free legal services to people. low income. The lack of reporting, she said, creates a problem for policymakers.
“It is difficult for lawmakers to know what is going on so that they can understand what is happening to their constituents,” she said.
DFI spokesman George Althoff confirmed that some loans go unreported under payday lending laws.
Between July 2011 and December 2015, DFI received 308 complaints about payday lenders. The ministry responded with 20 enforcement actions.
Althoff said that while “DFI is doing its utmost to determine whether a violation of the payday lending law has occurred,” some of the complaints concerned activities or businesses not regulated by that law, including 91 loans. days or more.
In many cases, Althoff said, DFI has worked with lenders to resolve the problem without enforcing the law. One of them was a complaint from an anonymous consumer who had eight outstanding loans.
“I have struggled to pay off the payday loans and it is a cycle that I cannot break,” said the complainant.
DFI found that the lender was unlicensed and the ministry asked the company to stop lending and repay all of the money the plaintiff had paid.
Federal rules eagerly awaited
On June 2, the federal CFPB, a regulator created by the Dodd-Frank Act of 2010, proposed rules to end the “debt traps” of payday loans. One of Dodd-Frank’s goals is to protect Americans from “unfair and abusive financial practices.“
The new rules would force some lenders to check borrowers’ ability to repay their loans. Net income, debts and living expenses should be taken into account before lenders can make a payday loan.
But by law, the CFPB cannot cap interest on payday loans. So unless state-level regulations change, Wisconsin consumers are likely to continue to face astronomically high interest rates.
According to a 2012 to study According to the Pew Charitable Trusts, “the amount borrowers spend on loans is highly dependent on fees authorized by their state.” Consumers in Wisconsin and other states with no rate caps pay the nation’s highest prices for payday loans, according to Pew, a nonprofit dedicated to using knowledge to solve “the biggest problems. difficult today “.
Bildsten said a “mishmash” of state laws governs these loans. According to Pew, some states do not have payday loans and some have strict interest rate caps. But, said Bildsten, “Wisconsin is pretty much the most open state in the country.”
Some in the industry, however, believe the proposed rules could do more harm than good. Darrin Andersen, COO of QC Holdings Inc., which operates Seven Quik Cash Payday Loan Stores in Wisconsin and many others nationwide, said further regulation of licensed payday lenders will encourage borrowers to seek loans from illegal sources.
“In the absence of highly regulated licensed lenders in the market, the rules proposed by the CFPB would push consumers to illegal unlicensed lenders,” he said.
The proposed rules have also been criticized for possibly leading consumers to long-term loans, where interest could accumulate even more.
Nick Bourke, Director of the Pew Charitable Trusts Small Loans Project, wrote that the proposal could speed up “the general shift to installment loans that consumers pay back over a period of months instead of weeks”.
Hintz said, “Knowing the industry, I guess we’re going to see more products turn into more dangerous, more expensive long-term loans.”
Consumer advocates and payday lenders agree on one thing: Sometimes consumers need quick access to small amounts of credit.
“In that sense, payday lenders are right – they are filling a need. They are extending credit,” said Barbara Sella, associate director of the Wisconsin Catholic Conference, which examines public policy issues of concern to the Church.
But, Sella said, alternative credit solutions from nonprofits or credit unions would be better than payday loans, she said.
“I think we could find organizations that aren’t making money with this and making a profit and reinvesting it to help more people,” Sella said.
For now, Warne has said she has no way of repaying her loan. She made a payment of $ 101, but has no plans to pay more on her debt, which, along with principal, interest and fees, will cost her $ 1,723.
Warne’s only income is a monthly Social Security check for $ 763.
Warne said she would “never again” borrow from a payday lender, adding: “I wish I had read the fine print.”