But you will get the money. Wisconsin's laissez-faire usury law has helped lure to the state nearly 200 loan companies known colloquially as "payday lenders," companies whose small outlet stores specialize in providing up to $500 to strapped borrowers who use their next paycheck as collateral. In exchange for providing this service, the lender charges a fee, usually between $20 and $35 on each $100 borrowed.
It is a business that has grown remarkably fast. Once practiced primarily in a few Appalachian states, payday lending is now a national phenomenon. In 1996, according to Wisconsin finance officials, there were 17 outlets in that state making about 80,000 loans with a total volume of $11 million. Two years later, the number of lenders had grown to 175, and they were making 850,000 loans, totaling $200 million. By most accounts, the pace has picked up since then.
This doesn't particularly bother the state's Department of Financial Institutions, which is charged with the job of monitoring such businesses. Wisconsin's DFI points to market demand, not lax laws, as the cause for the burgeoning of the industry. "We would view it as a reflection of the payday lenders filling a need out there," says Dave Anderson, who handles legislative affairs for the department.
But not everyone sees the state's emergence as a payday loan mecca quite so benignly. State Senator Judy Robson calls the lenders "poverty sharks," and says they "have moved into the state and taken over." She points to Wisconsin's non-existent interest controls as the main source of the trouble, and has introduced a bill that would reimpose a ceiling on the rate any lending institution can charge.
Robson's legislation has made little progress so far, and in her view, this is because the payday lending industry, which operates more than 9,000 outlets nationwide, has become a major player in state- level campaign finance. In the last election cycle, the industry was the single largest out-of-state contributor to the campaign of Wisconsin Governor Tommy Thompson, and it gave generously to several of the members assigned to committees that consider financial legislation. The lenders also paid one of the state's top lobbyists $48,000 to argue the case against a reimposition of interest-rate controls.
A similar scenario has played out in other states where relatively lenient usury laws have encouraged payday lenders to set up shop. Last year in Indiana, where payday lending is a $285 million industry, the state Department of Financial Institutions supported a bill that would have cut the maximum amount that could be charged on short-term loans. The state's 550 payday lenders, organized as the Indiana Deferred Deposit Association, countered with a bill eliminating any dollar caps, and mounted what the group's director calls a "far-reaching" lobbying effort. Both bills ultimately died, but that left the lenders with a status quo most of them could live with. Mark Tarpey, supervisor of the DFI's Consumer Credit Division, laments that his agency simply wasn't equipped to deal with a massive and coordinated lenders' effort.
The industry has never been bashful about acquiring lobbyists in bulk, and using them intensively. In Indiana, the Deferred Compensation Association began lobbying the issue during the legislature's summer recess, before the legislative session had even begun. When the issue came up in Tennessee a couple of years ago, the payday forces mounted what one state official referred to as a "blitzkrieg." "They hired a Noah's Ark of lobbyists," one legislator said afterward. "They hired a black lobbyist to get black votes. If we'd have had a transsexual, they would have hired a transsexual lobbyist."
There has been an extensive intervention on the other side of the issue, by consumer-protection groups such as the Consumer Federation of America and by state Public Interest Research Groups. Their efforts have been no less impassioned than the industry's--they charge the lenders with exploiting the most financially vulnerable segments of society--but they have been overwhelmed in money and manpower.
The financial transaction that has spurred all this zeal and effort is quite simple. A borrower uses the virtual certainty of his next paycheck to get a small amount of money--usually less than $500--right away. He writes a personal check to the lender for the amount of the loan, minus a fee. The lender agrees not to cash it until the borrower deposits his paycheck, usually within two weeks.
If all the transactions ended at this point, payday lending might not be very controversial. But frequently they don't. The borrower decides to postpone paying the principal by opting to pay another fee. If that cycle continues, debt piles up, and the borrower can be trapped underneath ever-mounting charges. One study by the Indiana DFI found that the average borrower rolled his loan over 10 times before paying off the principal in full. The president of Indiana's payday lender association doesn't dispute the state's assessment that the average customer isn't paying his loan back very promptly.
The crucial question for lawmakers and regulators is whether those additional payments are fees, as the industry insists, or interest, as consumer advocates argue. If they are interest, they are subject to regulation in most places.
The solutions suggested to deal with this problem, if it is a problem, are relatively simple. A state can treat the money as interest, and impose a ceiling on the percentage rate. Or it can call the same payment a fee, and place a limit on the dollar amount. Or, alternatively, it can limit the number of times a consumer can extend the life of a loan.
The industry considers both ceilings and strict fee limitations to be a threat to its right to do business. If payday lending has to be regulated, industry lobbyists say, some restriction on the number of debt rollovers would be preferable to any rate controls.
Nineteen states currently make payday lending difficult by treating the payday debts as interest and subjecting them to ceilings that the industry considers too low to allow them profitable operation. Twenty- three states allow payday lenders to do business based on provisions exempting them from the interest-rate caps that are applied to traditional lenders. Eight states, including Wisconsin, do not restrict payday lending in any way.
The issue of how to categorize borrower payments--as fees or interest--has been before the Indiana courts all year. After this year's legislature adjourned without passing any bill dealing with payday loans, the state DFI requested an opinion from the attorney general on whether the lenders were violating state law by making loans at annual rates above the statutory usury ceiling of 72 percent. The attorney general responded that the law was, in fact, being violated.
The lenders, in turn, sued the DFI in hopes of preventing the attorney general's opinion from taking effect. They argued that any reference to annual percentage rates is misleading when applied to short-term loans such as the ones their members issue.
In October, the Supreme Court dismissed the lenders' case, clearing the way for the usury law to be enforced against them. But further legal wrangling on this issue seems all but inevitable.
Wisconsin's financial regulatory agency, unlike the one in Indiana, has not taken a public position in favor of imposing interest-rate ceilings. The head of the Wisconsin Department of Financial Institutions, John Kundert, says that such caps "could very, very seriously affect the ability of these people to make their loans." He insists that borrowers share a great deal of the responsibility for educating themselves on the finer points of the financial transactions they make. And he believes that Robson's bill, imposing interest limits, died in the legislature last year mostly because consumers themselves weren't particularly favorable to it.
Robson has another explanation. "I don't think it's too puzzling," she says. "There was a lot of money moving through the legislature from these very powerful payday loan companies."
