Wisconsin Gov. Scott Walker (R) has just a few days to decide whether to extend vast new business privileges to payday lending companies in his state after Republican legislators tacked the expansion onto the state budget at the last minute without debating the proposal openly.
The measure would allow payday lenders to start selling new lines of products to their customers, including insurance, tax preparation services, and financial advice. It would also license them to market annuities, a complex financial product in which the consumer effectively gambles on how long they will live — and can face years with little to no income if they don’t die as soon as they planned.
Like payday loans themselves, annuities are a marketplace where the seller has far more sophisticated information and analytic tools than to buyer to guide their decisionmaking. The imbalance of information allows unscrupulous companies to steer vulnerable customers into inappropriate financial products that are likely to do more harm than good to the person’s financial stability.
Payday lending and consumer credit experts told ThinkProgress that such a policy is almost unheard of, suggesting that Wisconsin could be taking a radical step to expand payday lenders’ access to consumers’ money beyond what is common in other states that allow the loans.
When a business model is predicated on the kind of uneven information that marks annuities and payday loans, and public officials decline to put regulations in place to curb abuses, the only thing between consumers and predation is the good will of the company they’re dealing with. University of Wisconsin Law School professor Sarah Orr told the American Banker that allowing the payday lending industry to move into new lines of business with their existing low-income consumers is a recipe for harm. “I think the results for them and their families will be really catastrophic,” Orr told the trade paper.
Walker is also being urged to veto the expansion by 30 different faith groups, advocates for low-income families, and other public interest organizations. The average payday borrower in Wisconsin will pay 574 percent annual interest on their short-term loan, according to Pew Charitable Trusts research. Borrowing $300 for five months — the typical duration of a payday loan cycle — costs roughly $604 in fees and interest payments. Such triple-digit rates are the norm in states like Wisconsin that leave regulations on the industry light.
Walker has line-item veto powers in Wisconsin, and the state’s governors have often excised individual policy add-ons from the state’s budgets in the past. Walker’s predecessor, for example, used his veto scalpel to block auto title lenders from the state in 2010 after lawmakers had sought to allow that often-predatory industry into Wisconsin with some limits on how much cash they could extract from any given customer. Since the budget won final approval in the pre-dawn hours of Thursday morning, and Walker is reportedly planning to announce his White House candidacy on Monday afternoon, the governor’s review of the budget for potential veto decisions is already underway.
Payday lenders have been on a regulatory rollercoaster in Wisconsin in recent years. After decades of completely unregulated operation, a Democratic majority sought to provide consumers with some protection from the industry without pushing it out of business entirely. The 2010 state budget capped the amount that a payday borrower could take out at either $1,500 or 35 percent of her monthly income, whichever was least. But a GOP wave in elections later that year flipped control of the legislature, and Republicans quickly used their majority to loosen the new payday lending rules.
The industry had spent nearly $700,000 opposing regulation in the year prior to the Democratic rules passing. Several key GOP officials in the state have also received thousands of dollars in campaign contributions from the industry, according to the Milwaukee Journal Sentinel.
Several states effectively ban payday lending by setting interest rate caps that chase lenders away. But it’s possible to restrict the industry’s profits and protect consumers’ interests without squashing the lending entirely. Since most payday loan customers have no alternative for accessing financial services in an emergency, many analysts including Pew’s advocate for a moderate approach such as that taken by Colorado. A compromise package there lowered the average annual interest rate from Wisconsin levels down to 129 percent — still an incredibly expensive form of credit, but not the kind of permanent debt trap that prevails in low-regulation states.
Federal regulators are also on a quest to strike such a middle-ground compromise on the industry, though some lenders and their trade associations have accused the Consumer Financial Protection Bureau of looking to kill payday lending rather than restrain its most abusive practices.
But in making a decision about the proposal lawmakers sent to him in Wisconsin, Walker will be operating on much less trafficked ground. While some states allow insurance sales by payday lenders as a feature of their normal loan contracts, the Wisconsin measure permitting lenders to sell insurance and annuities as standalone products is almost unheard of, the Consumer Federation of America’s Tom Feltner told ThinkProgress.
“It’s a novel proposal that raises concerns about lenders whose standard business practice is to keep borrowers in debt for half the year on average. We’d be extremely concerned about those same companies offering other, more complex financial products,” Feltner said.