Frederica Freyberg:
But first, Democrats at the state Capitol announced Thursday that the wild west days of unregulated payday loans are about to be over. Wisconsin is one of the few states in the nation that does not have laws on the books regulating interest rates or loan amounts that businesses that advance cash based on a borrower’s next paycheck can impose. The interest on a payday loan in Wisconsin can go as high as 500 percent per year or more, and payday lending businesses have mushroomed to more than 500 today. The so-called Responsible Lending Act heads to the Assembly floor next week, a schedule Republicans note does not include a public hearing. Among other things, the bill would not cap the annual interest rate that lenders could attach to loans, but the bill would limit the amount of a loan to $600 or 35 percent of a borrower's two-week income, whichever is less. The bill would not allow roll-overs of a payday loan, which regulators say account for 90 percent of payday lending profits. Borrowers could only take out one loan at a time. And the proposed legislation would ban car title loans, which allow the lender to take a person’s car if they don’t pay back the loan. Now, Advance America, with hundreds of payday loan offices around Wisconsin, declined "Here and Now"'s invitation to appear tonight. On Tuesday, Assembly Democrats touted the need for their reform proposal.  

Donna Seidel:
Our payday lending work group has worked diligently over the past several months to put together the most significant and thorough reform of the payday lending industry in Wisconsin's history, legislation that will end the debt trap for thousands of Wisconsin consumers. What you see before you today is truly a compromise, representing a diverse set of opinions on a very controversial issue. While no one member of this work group is 100 percent satisfied with this compromise, we believe that the package is a very responsible approach to a serious problem.  

Frederica Freyberg:
That was state Rep. Donna Seidel. Joining us now from Washington D.C. is the Wisconsin point person for the lending industry watchdog group Center for Responsible Lending, Jennifer Johnson. Thanks very much for being here.

Jennifer Johnson:
Thank you for inviting me.

Frederica Freyberg:
What is your reaction to Rep. Donna Seidel calling this the most significant reform ever in Wisconsin, ending the debt trap and stating it as truly a compromise?

Jennifer Johnson:
It just sounds like the representative just doesn't understand, have a good understanding of how the industry works. I've looked through the proposed compromise. Some of my colleagues and colleagues in other organizations, consumer organizations, have reviewed this compromise. And there's just nothing in this legislation, nothing, that will help consumers take them out of that debt trap that they have in Wisconsin. And in fact there are certain elements of this proposed legislation that will actually do harm rather than not doing any good.  

Frederica Freyberg:
Well, let's get to those things in a minute, but I first want to ask for your reaction to the fact that the bill does not impose a cap on interest.  

Jennifer Johnson:
That's correct. And the problem that is unique to Wisconsin is that there's no authorization for payday lending. First of all, there are a number of predatory products. You have the car title predatory product and you have payday. This legislation proposes only to address the payday product. But because the state's rate cap was lifted back in 1993, I believe, there is no rate cap on any small dollar lending. And so if — even if there were some measures that would address the payday model, it's very easy and has been done before for the industry to just morph their product into another type of product. Next-door in Illinois you have installment loans. In other states you have other models. But to continue business as usual by calling their product by a different name.  

Frederica Freyberg:
So is that why you suggest that nothing in this bill helps the consumer? Because there are all those prongs of it that would appear to, including limiting the amount of money that someone could borrow, not allowing roll-overs which is suggested to be a big regulation that would help. Why won't those things? Because you're saying they'll just morph into some other kind of product?

Jennifer Johnson:
Right. And it doesn't take a whole lot of research to see this. All you have to do is study what the industry has done in other states when they were opposing reform. Let's talk about the roll-overs for just a moment. That's being touted as a significant reform, but in fact the roll-over is simply a smoke screen. You can take one payday loan and flip that loan more than 20 times in one year and never technically roll that loan over, because every time a borrower takes out a back-to-back loan, sometimes they're called touch and go loans, they pay off the loan, it's drafted from your checking account on your payday, so it's considered paid. But then the borrower is short that money, so they've got to go right back to the payday lender and get that money back because they need it. And so that's considered a new loan. And a borrower can do that every payday throughout the year, never having rolled over a loan. So the ban on roll-overs is really a trick that the industry had used five years ago. And it's — that's why I think the legislators are trying their best, but they just don't have a real grasp of how tricky this industry has been and they should probably consult with their colleagues from other states to see some of the same arguments have been — and same positions have been pushed in years past.

Frederica Freyberg:
Let me ask you about one other item in this, and it seems like what would appear to be a significant reform, that being banning car title loans, which allows a lender to seize the car if you don't pay it back. Banning that seems like a significant reform.

Jennifer Johnson:
It does seem like a significant reform, but what they've done in this legislation is in their ban on car title loans — and I would agree with you that the structure of the car title loan as the industry model is a predatory structure. But in this legislation they've defined the car title loan as a loan that has a term — a maximum loan term of 90 days. And so what would happen is the car title industry would simply make 91-day loans. I could clearly envision a scenario where they would have interest-only payments for those first two months and then on the third month, at the 90th day, then the entire loan would be due in a balloon payment. That's a key element of the predatory loan trap, is that it's a balloon payment, and it's due in a very short time. So that's a key element that the industry could do. So it's very easy. They'll make 91-day loans.

Frederica Freyberg:
Let me just, I'm sorry. Let me just interrupt and ask you this, because the devil's advocate side of this is that people need these kind of lenders who are living paycheck to paycheck, and the alternative is potentially overdraft checking account fees that get them into really bad trouble as well. So, I mean, are you suggesting that this industry shouldn't exist at all? Isn't there some purpose for it for some people who need this kind of ready cash between paychecks?  

Jennifer Johnson:
Not this model. I think that this model that this industry perpetuates is no good to anyone. It doesn't do any good. It only does harm. There are small loan products, as you know. There is a bank in Wisconsin, Mitchell Bank, that has a small loan product. They have, I think, 11 locations throughout the state. There are credit unions that have small loans. The problem is small loans. No one needs to pay it back in two weeks. An analogy someone told me is that it's true that people may be hungry, but just because people are hungry doesn't mean you need to serve them contaminated food. That's sort of what this product is. If they would change the model, you could make it work. But as it is now, triple-digit interest rates with a very short repayment term in a balloon payment form with access to your bank account, those are ingredients for disaster for borrowers.

Frederica Freyberg:
And so specifically, if you haven't already addressed it, how does this particular compromise bill actually hurt the consumer more than what we've got right now? And we just really about a half a minute.

Jennifer Johnson:
OK. Well, it authorizes payday. Currently you don't have anything authorizing payday. So it authorizes the payday product. It allows the industry to hold multiple checks for one loan, which they could then bounce going back to your bounced check question. It permits holding checks, unfunded checks, as a collateral for a loan. It permits Internet lending which isn't addressed under your law. It also permits access to a bank account as collateral for these particular loans. Those are just a few of the ways that this legislation actually does more harm than good.

Frederica Freyberg:
Well, Jennifer Johnson, we appreciate you joining us from Washington D.C. to take us through some of this.  

Jennifer Johnson:
It's my pleasure. Thank you.