A few weeks ago, I wrote about an effort that was underfoot in the State Assembly to institute common-sense limits on the interest rate imposed by payday loan stores, which have sprouted up in Wisconsin like weeds since Wisconsin’s cap on interest rates for consumer loans was repealed by the State Legislature in 1995. In 1995, Wisconsin had 17 payday lenders while today there are more than 542 across the state.
Earlier today, State Rep. Gordon Hintz of Oshkosh introduced AB 392, the Predatory Lending Consumer Protection Act, which would enact a 36% interest rate cap for payday lending stores if passed into law. In a press release issued to announce the new legislation, Rep. Hintz commented:
“This unprecedented level of support demonstrates that predatory payday lending reform is a high priority for the legislature” said Hintz. “Passing AB 392 into law is necessary and long overdue. Taking advantage of people in desperate times with no consideration of income and unaffordable repayment terms erodes worker earnings and for many imposes a high-cost debt burden that can be devastating. Unregulated payday lending is neither a necessary service nor sustainable model for the long-term economic prosperity of our state.”
As I wrote in my original blog entry, under current law (or lack thereof), Wisconsin payday lenders can charge triple-digit interest rates, which according to some studies can be as high as 500%.
It’s worth noting in 2007 the United States Congress enacted an interest rate cap of 36% – identical to the percentage in Rep. Hintz’s legislation – after determining it was necessary to protect military personnel and their families from the debt trap brought on by payday loans. What’s more, fifteen other states and the District of Columbia have either set interest rate limits or have outright banned payday lending in their states.
A copy of the Predatory Lending Consumer Protection Act and its co-sponsors can be viewed HERE.
Emily Mills at The Lost Albatross has more on this legislation.
Please put the interest rates in context. These loans are for 1 to 2 weeks. Your 500% interest rate is APR.
This is one of those funny issues for me. Kinda like prostitution actually. Something that in theory should be perfectly legal – but in the real world, they have a destructive effect on society.
As long as lenders are clear about the interest rates they charge (not at all a given) why should there be a limit? Freedom means the right to make stupid decisions too. But in the real world, ignorant people (those willfully ignorant as well as those genuinely less capable) get sucked into payday loans and are financially ruined. Understand, I really hate venturing into the the, “we know what’s best for you” territory. It’s on the to oppression. But ultimately, being pragmatic I figure in many cases, I end up paying for this in one way or another. Welfare & other programs they end up on, increased crime, etc.
But Locke, without the ability to access short-term cash flows, these people will still end up on the dole or committing crime.
Silent E is right; Rep. Hintz, as he is wont to do, is misrepresenting the issue of interest rates. And economically, his legislation is poorly designed if his plan ISN’T to outright drive these businesses out but rather to merely regulate them and have a continued presence.
Under the usual terms of the loans made by these firms, capping the interest at 36% does not generate the necessary revenue to pay the minimum wage and overhead expenses (rent, taxes, utilities, insurance, etc).
If Representative Hintz was being honest, as he ISN’T wont to do, he would propose an outright ban, but instead, as a practical matter, he just wants to come across as reasonable for his moderate district and shake down some payday lenders as protection money.
You and silentE do make a good point that it isn’t a matter of the rate itself, given the term of the loan. A one time, pay $115 or $130 for a two week advance of $100 is not unreasonable regardless of the APR. BUT the average customer rolls over their loan 10 times! Keep adding those fees up, and you find that the APR starts being much more meaningful again.
Personally, I’d like to see the payday loan places all just disappear. I believe they are a destructive effect and don’t really provide any value. 10 or 15 years ago, they weren’t around and we got along just fine. While we could come up with proper legislation and governance, the number of those places and how they operate makes effective enforcement and oversight really expensive.
Legislation banning them would at least be intellectually honest — not Hintz’s strong suit.
I tend to try & focus on the issues themselves rather than the politicians. I think they’re pretty much all dishonest and arguing about which one is a bigger liar is a lot less productive or interesting than trying to debate the issues and principles.
Can a politician be honest and have more than one term in office?
I think that’s a good point you make, Locke and Partially Blue. Having said that, though, politicians and their personalities and shortcomings are intricately intertwined with the policies they pursue.
Take for example my newfound love affair: switching ObamaCare to KennedyCare. While Democrats may think it sells the policy by linking it to the late Senator, I believe that linking it to him will ultimately help kill the legislation and movement for the short term. Why? Because Kennedy is a known liberal, his popularity with moderates and independents is fairly low, and the more people realize this was his cause will give them pause to support the legislation.
And as I said, that’s because politicians and their personalities are symbiotic to their policy pursuits.
I think its a very high interest rate.
Isn’t it?