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By Todd Rokita - Indiana Secretary of State

Seeking a temporary, quick fix to a long-term problem is rarely ideal. Too often — like now — we find our government doing this, and too often it happens with personal finances, as well.

Lately, my office has received questions regarding the legitimacy of “pay day loans,” and for good reason. While pay day loans will get you cash you may need to cover expenses quickly, they can have serious long-term consequences. In fact, the Center for Responsible Lending reports that pay day loans cost consumers nearly $5 billion in predatory fees each year.

To obtain a pay day loan, a borrower writes a post-dated check for the amount of the loan plus the lender fees and then receives cash for the amount of the loan. Once the loan period is up, typically in one or two weeks when the borrower’s next paycheck arrives, the lender cashes the check.

Most pay day lenders will charge a certain dollar amount per $100 borrowed; for example, they might charge $15 for every $100. So a borrower looking to get $300 for a two-week period would pay $45 in fees plus the amount of the loan.

This borrower would write a post-dated check for $345 and would leave with $300 cash.

Two weeks later, the lender would cash the check for the full $345. In this example, the annual percentage rate (APR) is 390 percent.

For one-time borrowers, pay day loans can be a useful solution.

However, for some borrowers, they often don’t have enough money in their account to repay the loan.

In these situations, lenders will either cash the check, causing it to bounce, or they will offer to roll over the loan for an additional fee.

That rollover fee, however, simply keeps the loan outstanding, rather than paying money down on the original principal.

The typical pay day borrower rolls over his or her loan more than once, and this is how 90 percent of pay day lenders make their money.

In fact, the Consumer’s Union estimates the average pay day borrower ends up paying about $500 in interest for a $300 loan and still owes the principal.

This over-reliance on pay day loans not only results in borrowers paying more fees in the long run, but can also have a lasting impact on their ability to obtain credit in the future.

Because of their high interest rates and predatory fees, pay day loans should be used as a last resort. Instead, consider getting a small loan from a credit union or local bank, which can sometimes offer lower interest rates than pay day lenders.

Also, help get your finances back on track by contacting your local consumer credit counseling service, who can help work out a debt repayment plan. Finally, take time to reevaluate your money management habits.

Create a realistic budget, avoid unnecessary spending and make a point to save some money each month.

If you feel like a pay day loan is your only option, borrow only as much as you can afford to pay with your next paycheck, and make sure the lender is licensed with the Indiana Department of Financial Institutions by visiting its Web site www.in.gov/dfi/ or calling 317-232-3955.

Finally, be especially careful of Internet lenders, as borrowing over the Internet increases the chances of identity theft.

For more tips on handling debt and managing your finances, visit www.IndianaInvestmentWatch.com.

A 2009 legislative battle royal is shaping up in Wisconsin, one of the last states without an interest rate limit that payday and title loan lenders can charge to their high-risk borrowers.

On May 28, state Rep. Gordon Hintz, D-Oshkosh, re-introduced essentially the same bill that died without floor votes during the 2007 and 2008 legislative sessions. The fate of those bills is testament to the political muscle of payday lenders in Madison.

The industry has exploded in Wisconsin over the past decade to more than 500 registered payday lending outlets around the state, from just 64 in 1996. There are seven payday and title loan stores in Superior, 12 in Oshkosh. Wisconsin has been fertile ground for payday lenders because it is among two dozen states where lenders making short-term loans of less than $5,000 are virtually unregulated. In Wisconsin, these so-called “licensed lenders” — variously operating as payday, car title, check advance, check cashing and cash advance stores — need only register with the banking division of the state Department of Financial Institutions, and pay a $500 annual fee to do business.

Typically, a payday lender provides an advanced loan to be repaid within a short-term period, generally two weeks. The usual fee in Wisconsin for a two-week loan is about $20 per $100 borrowed, which amounts to an annualized percentage rate (APR) of 525 percent. If the borrower can’t repay, the lender “rolls over” the loan with additional fees tacked on with each extension. A stark example: A $200 loan refinanced four times leaves the Wisconsin borrower owing $200 in additional fees in just 10 weeks, creating what critics of payday lending call the “debt trap.”

Those critics, both Democrats and Republicans, say the industry’s meteoric growth in Wisconsin has evaded regulatory oversight for a single reason: its political contributions to key legislative leaders. Wisconsin Democracy Campaign has tracked those political contributions and lobbying activity of payday lenders since 1999.

Executive director Mike McCabe said all of the major payday lending chains operating in Wisconsin are based outside the state, among them, Check Into Cash, Tennessee; Advance America, South Carolina; Check ‘n Go, Virginia; and Payday Loan Stores, Chicago.

During the period 1999-2008, the payday lending industry was the No. 4 out-of-state individual contributor group to legislative and statewide office candidates, according to Democracy Campaign (see chart below).

“It has been a significant source of money, and they give it to both Democrats and Republicans. They hedge their bets. It’s a bipartisan problem,” McCabe said.

The Democracy Campaign’s research shows about 40 percent of that money has found its way to Assembly Republicans, reflecting the party’s control of the lower body until Democrats won a majority in the November general election and took over in January.

Contributions to the Senate were evenly split, reflecting shared control of the upper chamber during the period. A major chunk of that money is contributed to party campaign committees controlled by leaders, who assign bills to committees.

Hintz introduced his 2008 bill in the second year of his first two-year term in the Assembly. In an interview, he said he knew his 2008 bill was doomed when Republican Assembly leaders in control assigned it to the financial institutions committee, another favorite industry target for its contributions.

Hintz is asking Democratic leadership that now controls the Assembly to assign his 2009 bill to the consumer protection committee he chairs. With thousands of Wisconsin families trying to hold on in an economy wracked by layoffs and foreclosures, predatory lending should have higher priority than during the earlier failed attempts to regulate the industry, he said. “This is our No. 1 consumer protection issue,” he said.

Hintz expects the Assembly to turn its attention to his bill after the two-year state budget for the biennium beginning July 1 is enacted. “This is the right thing to do, and I’ll be disappointed if we don’t have a bill for the governor to sign by the end of the year,” he said.

Gov. James Doyle, a Democrat, vetoed a watered-down, industry-backed measure in 2004 limited to consumer education. Doyle urged legislators then to return with a bill that capped interest rates. “He said ‘let’s do it right’ and this is that bill,” Hintz said.

His bill would prohibit payday lenders from charging more than 36 percent per year, and toughen penalties for violations. Current law limits punishment for operating without a license to no more than a $500 fine and/or a six-month jail sentence. Hintz proposes to allow a borrower to also sue a lender that charges more than 36 percent for damages equal to twice the finance charge, or for incidental or consequential costs to the borrower, whichever is greater.

In 2006, Congress imposed the 36 percent interest rate cap for active duty military borrowers.

The new bill Hintz has introduced already has attracted 36 Assembly co-sponsors, including Reps. Nick Milroy, D-Superior, Gary Sherman, D-Port Wing, Mary Huebler, D-Rice Lake, and Majority Leader Tom Nelson, D-Kaukauna. Nelson, the Democrats’ No. 2 leader in the Assembly, authored the failed 2007 bill, and is in a strategic position to steer it through the 2009 legislative process.

No companion bill has been introduced in the state Senate, but at least eight of that body’s 33 members — including Sen. Robert Jauch, D-Poplar — have indicated they will support a payday loan bill with the 36 percent annual rate cap, Hintz said.

Nevertheless, legislators present and past have no illusions about the uphill fight ahead. Hintz wouldn’t name names, but said 18 industry-paid lobbyists already are working the Legislature to block his bill. “That’s the most I’ve seen on any issue I can think of,” he said.

Among those lobbyists are Superior native William “Bill” McCoshen, former commerce secretary for Gov. Tommy Thompson; and Shawn Pfaff, a former Doyle staffer, according to the Wisconsin Ethics Board Web site, http://ethics.state.wi.us.

Rep. Frank Boyle, D-Superior, who retired last year after 11 terms in the Assembly, was a co-sponsor for Rep. Nelson’s Assembly Bill 211 that was bottled up in the 2007 session. “It was the most political influence peddled since the Brewers (Miller) stadium bill, one of the most disgusting things I saw,” Boyle said. “Leadership in both parties (colluded) and the bill never saw the light of day.”

Given the changed economic landscape since then, Hintz has drawn a clear line in the sand with his 2009 proposal that will force leadership in both parties to choose between money and what is right, Boyle said. “It’s going to be one helluva fight,” he said. “My money is with the money.”

Another payday lending critic is Superior Mayor David Ross, who has led a local effort to curb payday lending using restrictive zoning. As a result, the number of payday outlets in the city has dropped from eight to seven, he said.

Ross, a Republican exploring candidacy for lieutenant governor in 2010, resorted to the zoning tactic after pressing legislators in both parties in 2007 to cap interest rates and limit the allowable number of payday loan “rollovers.” He watched in disgust as Republican and Democratic leaders buried Nelson’s 2007 bill in committee.

“It was laughable. There’s a role for government to protect against predatory practices, but most of what I’ve seen so far has been hypocrisy…lip service even to the point of sponsoring bills they know won’t pass, while taking massive amounts of money from the industry,” he said.

Ross spares Nelson from that criticism, calling the new Assembly majority leader a thoughtful, forceful advocate for protecting victims of predatory lending. In his new role, Nelson will have considerable influence over whether the Hintz bill becomes law, and Ross will be watching for the bill’s committee assignment. “This will be the (first) test,” he said.

Gov. Mark Sanford should have signed a bill that would have imposed some minor restrictions on payday lenders in South Carolina. Instead, it’s up to the Legislature to override Sanford’s veto of modest controls on an industry that sometimes preys upon South Carolinians who are living on the margins.
In fact, this bill does not go far enough. Previous attempts to regulate this industry were preferable, but all of them have failed. So this bill probably is about as good as it’s going to get in terms of payday lending restrictions in South Carolina.

Already, most states and the federal government have regulated this industry. Some states, including Georgia and North Carolina, have banned the practice. It’s past time for South Carolina to put the reins on payday lending, as well. The Legislature should override Sanford’s veto of these minimal regulations.

Payday lenders offer short-term loans, typically for $300 or less. The lenders charge fees equal to annual rates that in some cases exceed 700 percent. Some of these lenders prey on people who are out of options, and the loans can create a cycle of debt that ends in financial ruin.

The lenders say they offer a service that’s in demand. Yet, although there’s no doubt people use payday lenders, there’s also room for reasonable regulation of this industry.

Sanford was wrong when he wrote in his veto message that payday lending is not “ripe for government regulation and control at the level put forth in his bill.” Limiting payday lending, he wrote, will force consumers to seek out less regulated or even illegal forms of borrowing.

The regulations this bill would place on payday lending would not force the lenders out of business — it simply would ensure the loans aren’t being used in a way that perpetuates a cycle of mounting debt that can cause financial catastrophe.

Under this bill, loans would be limited to $550; consumers would be prohibited from having more than one payday loan outstanding at any given time; a one-day waiting period would be established between loans for the first eight loans, with a two-day waiting period on any loans beyond that; a statewide database would be created to track who is eligible for payday loans.

Such rules certainly will not ruin the payday lending industry.

The proposed limit far exceeds that in previous attempts at regulation, and is above the industry-wide average for payday loans. It makes sense to prevent people from having more than one loan at a time — by definition these loans are small, short-term loans designed for emergencies. The waiting period is essential because it would prevent consumers from repaying a payday loan by taking out another payday loan, an action that creates the cycle of debt that worries many industry opponents and consumer advocates.

Sanford has, to a fault at times, been a rock when it comes to his principled stands against government regulation. This is one of those times. However, the Legislature has the power to override this veto, and it should do that. It should also remember that this bill leaves room for even stricter regulations in the future if these rules prove ineffective.

Del. Glenn Oder’s work to shut down the payday lending industry will eliminate short-term loan options for many Virginians. Oder ignores the increasing number of constituents and hardworking consumers who are struggling to gain access to credit in today’s economy (”Newport News candidates square off,” May 1).

Contrary to Oder’s claims, a Dartmouth College study found that a 2007 ban on payday lending in Oregon hurt borrowers, forcing them to turn to more expensive alternatives, such as bounced checks, overdrafts and credit card cash advances.

A New York Times Magazine article last year noted that payday loans are a valuable financial tool, offering easy-to-understand conditions, with “no surprises, no hidden fees,” unlike many banks (who are not demonized by elitist politicians, despite their hidden fees).

Shutting down the short-term payday loan industry only forces these borrowers to resort to less desirable alternatives to make ends meet.