Story originally printed in the La Crosse Tribune or online at www.lacrossetribune.com

Published - Sunday, July 29, 2007

Payday crunch: Are loans a bailout or rip-off?

By DAN SIMMONS | La Crosse Tribune

If you’ve watched late-night television, you’ve probably seen ads featuring a leggy woman driving away in a convertible sports car with her chiseled husband, cash in hand from a payday loan. The message: Take out a payday loan, take a vacation.

But the reality is closer to: You have a maxed-out credit card, an overspent checking account and a car muffler that just fell off. You need money now, and the usual sources — banks or credit unions — won’t provide it.

Twenty-nine payday loan stores have sprouted on Main Streets and suburban strip malls in five area counties — La Crosse, Vernon, Jackson, Crawford and Monroe — part of a state and national explosion in business.

Drive around, you’ll see the signs — CashFast, FastCash, ChecKing, Check n’ Go, SpeedyLoan, EZMoney.

Owners say they serve people that banks turned away long ago and provide money fast for people in a financial pinch. But the industry’s many critics decry them as predatory lenders that charge sky-high fees and trap people under a heap of debt.

They’re banned in 13 states, but in Wisconsin they’re legal and subject to no regulatory limits on loan terms. And they’re expanding, according to figures from the state Department of Financial Institutions.

In 1996, the state had 64 payday loan locations; in 2006, there were 474. Their average loan then: $140. Average loan last year: $389.

“These people are ripping people off all across the country,” said state Rep. Marlin Schneider, D-Wisconsin Rapids, a La Crosse native who authored a bill in the Assembly to curb the interest rates charged on payday loans.

“Do you really think our customers are choosing us because they like getting ripped off?” countered Cole Heller, owner of four payday stores in Wisconsin, including CashFast on Rose Street in La Crosse. “Have you gone to your local bank and asked for a $300 loan lately? Do you know what they’d say to you?”

How they work

Walk into a payday lender with a pay stub and a blank check. You can walk out with $100 to $1,000 cash, minus the lender’s fee, which typically is about $20 for every $100 loaned.

You’re required to have a checking account, but some payday customers open a checking account solely to take out payday loans, according to an ex-payday store manager who asked not to be identified.

You sign an agreement promising to pay the loan off two weeks later. The applications clearly explain the loans’ annual percentage rate in massive bold letters.

A study of payday lenders by the Department of Financial Institutions in 2000 found an average annual interest rate of 542.2 percent. A $100 loan, paid off a year later, would cost the customer $548.45.

If you can’t pay off the loan on time, you can extend it for additional weeks by paying just the interest or additional fee — or you can go to another payday loan store to borrow money to pay off the first lender.

Mary Jacobson, financial counselor at Catholic Charities in La Crosse, said she has seen clients who simultaneously were using eight local lenders. As the industry has risen, so has the number of clients in her office, she said, crippled by debt and, in some cases, facing bankruptcy or foreclosure.

But Heller said most payday customers pay off their loans on time, so quoting an annual percentage rate is misleading.

“It’s like asking your dentist to quote an hourly rate,” he said. “These are two-week loans. My customers know it’s going to cost them $20 to put a $100 bill in their pocket for two weeks. ”

The former manager said they truly prefer customers who pay off loans on time or within a month or two.

However, the person also said the industry looks forward to tax season.

Customers often extend loans until their tax returns come — then pay them off with the return, the former manager said. While most customers vow never to return after settling their debt, often they’re back within two weeks for another loan, the person said.

Why?

The reasons for taking out the loans, which explicitly state their annual percentage rate on top of the application, can cause head-scratching.

“Unless you positively knew you were going to get a big chunk of money in the next month, what on earth makes you think you’re able to pay off that loan?” asked deacon Richard Sage, executive director of Catholic Charities in La Crosse.

Jacobson said those in financial trouble often have the mindset that, “‘If I get this money now, it will get me out of my situation now and things will be better next week’ — I see that mentality every day in clients,” she said. “They’re not able to see the big picture.”

The DFI’s 2000 review of 17 state payday lenders found the average loan applicant has annual earnings in the low $20,000s, is more likely to rent than own and takes out loans with an average repayment time of 14 days, usually to cover emergency expenses.

A Department of Defense study found service members were four times as likely to be customers of payday loans, as the lenders often cluster near military bases. It led the federal government to cap interest rates for payday loans to U.S. armed forces members, due to perceived predatory lending to them and their spouses.

The growing ubiquity of payday lenders, and their aggressive advertising campaigns, make it that much more enticing, Sage said.

In this area, store employees plaster vehicle windshields with fliers in the shape of dollar signs. Jacobson found one such ad decorating her car after a craft fair at Sparta High School.

“Spent too much at the craft show?” she asked, imagining an advertisement. “Come get a payday loan.”

State Bank of La Crosse senior vice president Wayne Oliver said he had to chase away a crew slapping payday loan ads on vehicles in the State Bank employee parking lot in downtown La Crosse.

Legal — But Moral?

Oliver acknowledged payday lenders have arisen out of “a legitimate need” people have to obtain small sums of money fast for emergencies — one that banks and credit unions aren’t able or, in some cases, willing to fill.

But while payday lenders have acted within the law, he questioned whether the practice is “morally or ethically” responsible.

“How do you do the right thing the right way?” he asked rhetorically.

Oliver became aware of the issue when Sage sent a letter to local business leaders to raise awareness of the growing financial woes caused by payday lenders. He studied the issue further in depth as part of a graduate-level Prophetic Leadership class at Viterbo University.

And now he’s working with a local consortium of business leaders and charitable representatives to start an alternative-lending program that would serve the same people who now rely on payday lenders — without the exorbitant fees.

After studying alternative lending programs in other parts of the country, Oliver said he’s “not sure there is a best answer yet.”

But that hasn’t deterred him from seeking his own answers.

“I’ve got a dream I’m trying to sell,” he said. “Are there people who would become members of a lending co-op? Are there a hundred or a thousand people who would put $100 into a lending pool to make these loans? I think the answer is yes, and I think my vision here is to try to get a group of financial institutions to back that lending pool with a line of credit.”

Sage supports Oliver’s push to establish a new local lending option, but he also is looking to the state Legislature to impose stricter controls on the industry.

Madison inaction

Wisconsin has no regulatory limits on the terms, amount or maximum fees charged for payday loans. It does charge an annual licensing fee for lenders that charge more than an 18 percent annual interest rate. Typically, state licensing and inspection fees cost a lender about $1,500 a year, said the former payday manager.

A 2004 bill that would have imposed limits on payday lending passed both houses of the Wisconsin Legislature before being vetoed by Gov. Jim Doyle, who said it didn’t go far enough in protecting consumers.

An amended version, Assembly Bill 4, was introduced Jan. 12 by Reps. Schneider and Amy Sue Vruwink, D-Milladore. It would cap payday loan interest rates at 2 percent a month, or 24 percent a year.

The bill was referred to the Assembly’s Committee on Financial Institutions — where it has sat without a public hearing since January. Schneider said he’s shocked at the lack of outrage among his fellow lawmakers.

“They understand these (payday loan owners) are crooks,” he said. “But now it’s all about money and campaign contributions. No one cares about issues like this anymore.”

If passed, the bill likely would result in a $268,000 revenue loss in licensing fees payday lenders now pay to the state, according to a state budget estimate that accompanied the bill.

Schneider acknowledged it stands little chance even of earning a hearing, much less passing.

“We’re a do-nothing Legislature,” he said. “We hardly ever even meet.”

How It Grows

Interest charges for a $200 loan unpaid after 10 weeks with various annual percentage rates:

12% — $4.60

36% — $13.81

500% — $191.78

Source: Wisconsin Department of Financial Institutions

Know your subprime lenders

There are two main business models that instantly give money loans to people without requiring a credit check:

Auto title loans: Get cash using an automobile title as collateral

Payday loans: Get cash using an checking account as collateral

THE HISTORY OF PAYDAY LOANS

The practice of payday lending has its roots in “midget loans” that began in the late 19th century and thrived until states regulated them into nonexistence after World War II. Lenders known as “5 for 6 boys” fronted customers $5, with $6 due the next payday.

A 1941 study reported the loans had annual percentage rates of 279 percent to 559 percent — similar to those currently charged by payday lenders. The “5 for 6” loans also were once common in the military.

Source: Consumer Federation of America

Dan Simmons can be reached at (608) 791-8217 or dsimmons@lacrossetribune.com.