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Payday loan regulations stalled in Madison

April 9, 2006 - Madison, Wisconsin

The prospect of regulating Wisconsin's growing payday lending industry is going nowhere, and a new proposal in the Legislature isn't likely to do anything to break the impasse.

A Senate bill, which would cap interest on payday loans at 5% - instead of the 20% typically charged on an initial loan - simply would drive the lenders out of business in the state, an industry spokeswoman says.

That would be just fine with state Sen. Glenn Grothman (R-West Bend), who sponsored the bill.

"They charge outrageous interest rates and they make poor people poorer," Grothman said.

But that sentiment - contempt toward payday lenders by consumer advocates - is exactly what's making a compromise impossible, some say. As a result, Wisconsin is one of the few states that doesn't regulate payday lenders, said state Rep. Jean Hundertmark, a Clintonville Republican who last summer held a public hearing on the issue.

"The industry was willing to make some concessions, the others were not," Hundertmark said.

Meanwhile, the unregulated payday loan industry continues to grow in Wisconsin.

There were 442 payday loan locations in the state at the end of 2005, up more than 12% from 393 in 2004. Already this year, 10 more outlets have opened. Over the last decade, the number of payday loan locations in Wisconsin has increased almost seven-fold.

In a typical payday loan transaction, a borrower writes a postdated check to the lender for the amount of the loan plus a fee - usually $20 for each $100 borrowed. The lender agrees not to cash the check for a short period, often two weeks, or in theory, the borrower's next payday.

Proponents say it's a better alternative than writing a check and having it bounce, which nowadays results in a fee of about $30 from the bank.

The trouble is that some payday borrowers take out more than one loan at a time and have difficulty paying them back. Others, unable to pay a loan back on time, hand over another fee to extend it. Fees for rollovers quickly can amount to annual percentage rates in triple digits.

Industry spokeswoman Peggy Partenfelder-Moede said payday lenders aren't against regulation, such as limits on how many times a borrower can pay an extra fee to delay repaying a loan. However, she said, "The bottom line is that we are not going to support legislation that puts us out of business."

Tracking system

Previous legislation got as far as Gov. Jim Doyle's desk in 2004. But Doyle vetoed the bill, saying it was too weak.

One of the concerns of the Doyle administration is that, even if lenders agree to limit the number of loans or rollovers a person has, there is no way to enforce limits unless there is an electronic database to track payday loans.

The Department of Financial Institutions insists that a payday loan tracking system is needed, and it would be much less expensive than having employees check lending records.

"It's just to ensure that, with whatever provisions are put in place in the law, you would be able to monitor those through this database," said Carrie Templeton, executive assistant in the Department of Financial Institutions. "If there were a real-time database, where all of the lenders were connected, they would be able to know right away that Joe Smith has a loan at another location already so you can't give him this loan."

Partenfelder-Moede, a lobbyist for the Wisconsin Deferred Deposit Association, said a tracking system poses "a massive privacy issue."

She said there is no such system for credit card users or any other type of consumer spending.

"How does the average Wisconsin citizen feel about having their financial spending habits tracked?" she said.

University of Wisconsin-Madison law professor Steve Meili said it's possible to run such a system without breaching the privacy of borrowers. Meili, of the Consumer Law Litigation Clinic in Madison, said there's no question the industry needs regulation in Wisconsin.

"There is no limitation on interest rates, there is no limitation on the number of rollovers. So it's one of the worst environments for consumers in the country with respect to payday loans," Meili said.

Kathryn Crumpton, manager of the non-profit Consumer Credit Counseling Service of Greater Milwaukee, said the fact that new locations keep opening up is proof payday lenders fill a niche, "no matter what we think of that niche."

Quick and easy

"They're quick, you don't have to have good credit. You just have to have a steady source of income and a checking account," Crumpton said. "If you're desperate, your car's broken down and you've got to get to work the next day, what are you going to do?"

Grothman said, however, that he believes "only a tiny fraction of these loans are for genuine emergencies."

Crumpton, herself a consumer advocate, said people pulling for consumers on the issue are so passionate that they "don't always see the big picture."

Some said Grothman's bill, which he sponsored with longtime payday lending foe Judith Robson (D-Beloit), is too hostile to the industry to get anywhere. But it might keep the issue off the back burner.

"At least it keeps the discussion going," said Templeton.

News Source

Milwaukee Journal Sentinel, Paul Gores, Staff Writer

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