Payday Loan Times

An opinion piece in The Wisconsin State Journal asks:

Let’s say you are the breadwinner in a low-income family. You are working your way out of poverty when your car breaks down. You need $500 for repairs.

Where do you go for a loan?

The decision you make next could determine whether you continue to work your way out of poverty or get dragged into a debt spiral. That is why Wisconsin financial institutions should expand their efforts to provide small, convenient loans to low-income people.

Financial institutions that provide small loans with a quick, no-credit-check application process offer an alternative to faxless payday loan lenders, whose high-cost loans too often sink borrowers deeper into debt.

Traditionally, banks and credit unions have bypassed low-income borrowers, considering them too risky and their loans too small to be profitable. Consequently, while some consumer finance companies offer small, short-term loans, most of the market has been left to payday lenders.

Providers of payday advances, which have shown explosive growth in Wisconsin, offer loans to be repaid by the borrower’s next paycheck. The lenders profit from hefty fees on the loans.

Meanwhile, borrowers get into trouble when they remain short of money after their next paycheck. They then roll over their loans and pay more fees. After several rollovers, they are likely to be hopelessly in debt.

Improved state regulation limiting the number of allowable rollovers would help. But regulation alone is not the answer. Wisconsin needs more lower-cost alternatives to faxless online payday loans.

A few Wisconsin banks and credit unions have developed small, convenient loans for low-income customers. For example, Summit Credit Union in Madison offers its members a line of credit of up to $1,000, with a quick application process that requires certain qualifications but does not include a credit evaluation.

Because the credit union accepts the risk of not checking the applicant’s credit, the interest rate is high - 29.9 percent. But the cost is still far lower than for cash loans, which can cost, in fees, the equivalent of 500 percent in annual interest.

Furthermore, borrowers get an opportunity to establish a credit record and gain financial management skills.

Last month economist Muhammad Yunus won the Nobel Peace Prize for his work in microlending - the traditionally overlooked business of making small loans - to transform the destitute of the world into entrepreneurs. Wisconsin could use more of its own version of microlending.

PLS Payday Loan Store locations in Alabama, Arizona, California, Illinois, Mississippi, and Wisconsin donated a total of $18,000 to community schools.

The donations were part of a Back to School promotion, in which customers nominated local schools to receive $200 donations. The winning schools were selected with drawings held at each PLS Payday Loan Store on August 26.

The cash advance company donated $5,000 to elementary and high schools in Illinois and $4,800 to Wisconsin schools. Arizona schools received $3,400, while donations to Mississippi schools totaled $3,000.

"A good education is the key to our children's future," said Charlie Murphy, executive vice-president of Chicago-based PLS Payday Loan Store. "PLS is committed to being a good neighbor and helping our community schools stay strong."

Some might say this provider of fast payday loans simply acted in the name of public relations - but that doesn't change the fact that these schools received money.

It wasn't hard for Jim Schrimpf to spot a disturbing trend at Brewery Credit Union: Members were using payday advance loan lenders instead of the credit union for small, short-term loans.

Schrimpf said payday lenders were coming into the credit union regularly to cash checks written to them weeks earlier by Brewery members.

"We estimate probably 15% of our membership either had a payday loan or were doing business with a payday lender within the last 12 months," said Schrimpf, who is president and chief executive of 7,000-member Brewery Credit Union told The Milwaukee Journal Sentinel.

That meant that Brewery members were paying the going rate of at least $20 for every $100 borrowed - which amounts to interest of more than 500% when expressed as a yearly rate - for the typical $350 cash advance.

Schrimpf said he felt compelled to do something.

After seeking guidance from the industry's Filene Research Institute, Wisconsin Credit Union League and Milwaukee consumer finance lawyer Amy Salberg, Schrimpf set up a payday-like program called "Fast Cash," which offers loans to members at less than half the cost of traditional payday loans.

The payday advance alternatives: In Brewery's program, members pay $9.95 for every $100 borrowed. In the process, they receive some financial education and encouragement intended to eventually get them off the high-cost borrowing cycle.

Brewery Credit Union has made about 100 Fast Cash loans to its members since it started last winter, and Schrimpf is hoping the concept catches on to the extent that it poses some real competition to faxless payday loan lenders in the Milwaukee area.

"It's been very well-received," Schrimpf said. "We're proud of what we're trying to do."

It's hard to say whether efforts such as Schrimpf's - and similar programs around the state and nation - will put a dent in the growing payday lending industry. But consumer advocates are happy to at least see someone trying.

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A record number of people in Wisconsin are being lured in by the promise of fast and easy cash.

To what degree? These days payday advance lending is a $40 billions business. Some money managers, however, say such loans can give consumers a big headache.

Financial Adviser Lynn Knaack, for instance, says the lure of quick and easy cash is hard to ignore when bills are due.

"Your in that vicious circle where you live paycheck to paycheck so primarily they think that its okay they'll pay it off later," Knaack said.

Knaack works for Money Managers, a debt counseling service. She says many of her clients use cash advance loan providers and she sees that as a big problem, referring to them as a "legal loan shark."

Nevertheless, their popularity and number is growing, outpacing both Starbucks and McDonald's. There are more than 22,000 nationwide, with ads all over TV and radio.

Knaack says one of her clients learned that firsthand the trouble that can be associated with a regular or a faxless payday loan.

"She took out a loan for three-hundred, well in a month's time she'll owe 60 dollars on that," Knaack said.

And that's not even the highest rate.

Pete Peterson, meanwhile, is the president of US Bank in Eau Claire. He actually says some critics of fast cash advance companies are being unfair.

"They're there obviously for a reason, they're there because there is apparently a need for some people to use them, so I think that it's a viable business," Peterson said.

A viable business Knaack admits is not all bad. She says many cash advance lenders are willing to negotiate with her clients. But for those deep in debt, that's not always enough.

As a result, Knaack says the trick is to start small.

"You need to take it a step at a time and do what you can, even if it's just a little bit, don't give up," she said.

Having seen what other Wisconsin cities, such as Racine, have done about payday loans, the city of Wausatoas has placed a one-year moratorium on the businesses. During that time, it will consider measures that restrict cash advance stores to particular areas in the community.

Tuesday's vote by the Common Council blocks EZ Corp., based in Austin, Texas, from opening an EZ Money Payday Loan Store at 6502 W. North Ave. in the East Town Business District.

EZ Corp.'s local attorney, Harvey Goldstein, who had threatened litigation if the moratorium passed, declined to comment Wednesday. But a spokeswoman for the state agency that regulates fast cash loan companies applauded Wauwatosa and other communities that have such restrictions.

"It's exciting to see these communities take this into their own hands," said Carrie Templeton, of the state Department of Financial Institutions. "We need some momentum to get the Legislature to enact reasonable protections for consumers."

According to Templeton, companies typically charge $20 for each $100 borrowed - and the fees mount as customers who are unable to make that payment extend the bad credit payday loan.

"The effective interest rate can be well over 500 percent," she said.

Wauwatosa's moratorium is in response to neighbors' complaints that the W. North Ave. store would attract crime and lower property values. The measure prohibits for up to one year check cashing, payday loan and similar businesses from locating within 300 feet of residentially zoned parcels and within 1,500 feet of a similar business.

During this period, officials will decide whether they ought to restrict such businesses permanently and to amend its trade district zoning ordinance to keep them out of its boutique business areas, such as East Town and the Historic Village.

A public hearing on the trade district ordinance has been set for 7:30 p.m. Oct. 17 at City Hall.

The current language restricts "check cashing businesses" in those business districts; therefore, Goldstein has argued that that term does not cover EZ Money stores and their payday cash advances.
"The council's intent was clearly that they didn't want any of these kinds of businesses," Community Development Director Nancy Welch said. "But check cashing stores was the operative expression at the time."

Wauwatosa is among a handful of Wisconsin communities that have imposed restrictions in recent months on an industry that's grown exponentially over the last decade. According to Templeton, there were 64 short-term loan businesses in Wisconsin in 1996. Today there are 470, 30 of which opened in the last nine months.

It started with different kinds of cheap payday loans. The city of racine placed restrictions on such cash advances. Now, pawn shops may receive the same treatment.

The Journal Times, however, is reporting that a local man who intends to open a pawn shop is hoping to fight back. Monday, the License and Welfare Committee deferred action for two weeks on Terry Jackson’s application for a second-hand dealer’s license.

Jackson has a lease on the storefront at 949 Washington Ave., where he hopes to open what would be Racine’s only pure pawn shop. The committee, however, went ahead and also unanimously recommended a 90-day moratorium on pawn shops, looking to analyze them with the same scrutiny previously reserved for cash loans.

The action came at 11th District Alderman Greg Helding’s urging.

“I don’t know Terry Jackson,” he said Tuesday. “It’s nothing against him personally.”

Helding said quick payday advance shops proliferated before the city council got around to reining in their growth. With pawn shops, “I want to fix it before it becomes a problem.”

Committee Chairman David Maack agreed with Helding.

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You can't blame a payday loan company for trying. 

Representatives from a EZCorp - a Texas-based provider of cash advances/loans - tried convince the city's Plan Commission to reconsider changes to the city's zoning codes that would restrict their business. The firm failed in its efforts.

Instead, on Wednesday, the Plan Commission took another look at a proposed ordinance that would amend existing zoning codes and place certain restrictions on payday loan businesses. The commission once again approved said amendments that define what a convenient cash business is and establish a distance between stores in an effort to restrict their locations.

The goal of the new payday loan law: Such an ordinance would amend the city's zoning codes by defining convenient instant cash loan businesses - making them a conditional use - and setting a distance requirement of 2,500 feet between stores and 250 feet from any residential district. The City Council will vote on the ordinance at its meeting next Tuesday at 7 p.m. at City Hall We'll have the results for you.

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Looking for a Wisconsin payday loan? You may need to drive a bit further in order to get it.

The Journal Times reports that a plan to restrict the location of payday loan stores in Racine is headed to the City Council next week. On Wednesday, the city's Plan Commission approved adopting an ordinance that amends the existing zoning codes, making it more difficult to open convenient cash advance loan stores in the city. 

This is something Alderman Greg Helding said should have been done a long time ago. Helding, a Plan Commission member, and Alderman Aron Wisneski pushed the payday loan issue onto the agenda.

"Essentially, they're bad," Helding said. "All indicators I have seen show them to have a detrimental effect on neighborhoods, especially when they cluster."

There will be a public hearing during the City Council meeting July 5.

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The Center on Business and Poverty at the University of Wisconsin-Madison received a two-year, $35,000 grant from the Helen Bader Foundation.

The UW organization researches and disseminates information that helps companies assist their low-income employees. The grant from the foundation will fund a program to teach better financial management to low-income, Milwaukee-area residents.

The Center on Business and Poverty is an initiative of the Institute for Research on Poverty. It arranges for qualified volunteers to work through companies to assist employees in filling out tax forms. Employees learn more about other financial resources as well, such as ways to deposit paychecks directly, avoiding overdraft fees, or ever having to rely on last-ditch options like fast payday loans.

"For low-income people, tax time the biggest financial day of the year. Refunds and credits often are picked up during tax season. If employees get good advice from the volunteers we bring in to do taxes at work, it can make all of the difference for low-income families," said John Hoffmire, Director of the Center on Business and Poverty.

Federal Reserve Chairman Ben Bernanke recently stated that while most Americans manage money reasonably well, low-income families have the greatest difficulty.

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Looking around the 12th District, Alderman Aron Wisneski said he and his neighbors have noticed a proliferation in west Racine of a certain type of business - payday loan stores.

"We all started to remark how these places were popping up like mushrooms in the rain," Wisneski told the Milwauke Journal Sentinel.

Meanwhile, Ald. Greg Helding, representing the 11th District, was concerned about what he was hearing was happening to some people who use bad credit payday loans in general.

"I talked to one person whose sister was basically ruined by such establishments," Helding said.

The two aldermen decided to try to do something about it. Their first step was to propose a 90-day moratorium on any new quick cash loan businesses. The proposal won unanimous support from the Common Council last week.

A study by the state Department of Financial Institutions found there were about a dozen payday loan stores in the entire state in 1995; by 2005, there were more than 400.

In Racine, there are about a dozen payday loan stores, several within blocks of each other. Helding said he is concerned that these businesses are taking advantage of people who are already struggling financially by charging exorbitant interest rates.

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