Wisconsin congressman behind bipartisan push to crack down on payday lenders
Payday lenders offer quick cash to those who are in difficulty. But for many consumers, short-term loans become a trap, and they end up taking on new debt just to pay off interest rates that regularly reach 400% or more.
A new bill in Congress would cap these interest rates at 36%. He has the backing of Democratic lawmakers in the House and Senate and a conservative Republican from Wisconsin.
In 2006, Congress passed a law establishing a 36% cap on active-duty military personnel in the country. The new law would extend protections to all consumers.
“You must be wondering if it is immoral to give this type of loan to someone who is in the military now, how is it okay to give the loan to someone else?” U.S. Representative Glenn Grothman R-Glenbeulah said on a call with reporters.
Grothman is one of the main sponsors of the bill, with US Democratic Representative Jesus “Chuy” Garcia of Chicago in the House and US Senator Jeff Merkley, D-Oregon. He said he was conservative in nature and skeptical of many government interventions, but sees this as an issue where it makes sense for government policy to help protect consumers.
“In a perfect world, we would have more financially educated people,” Grothman said, “and these places would go broke on their own.”
One of the reasons lawmakers are getting involved now is the rise of online services that offer short-term loans. These can be used to avoid interest rate ceilings instituted at the state level. And some states, including Wisconsin, have no cap on short-term rates.
Grothman is a former state legislator, and he was part of a push for interest rate caps when he was in the Wisconsin legislature. These efforts did not lead to a change in the law. In 2010, then-Speaker Mike Sheridan, a Democrat, admitted to dating a lobbyist for payday lenders. Republicans, including current Assembly Speaker Robin Vos, R-Burlington, have accepted tens of thousands of dollars in political donations from the payday lending and securities industry.
In a statement, the head of a consortium of online payday lenders wrote that legislation introduced by Grothman and Garcia “would eliminate secure access to credit for millions of Americans.”
While some people use payday loans as a short term solution, the risk that the loans end up piling up on top of each other is real. The Federal Bureau for Financial Consumer Protection found that “more than four in five loans in five are re-borrowed within a month … and nearly one in four original loans are re-borrowed nine or more times, the borrower paying much more in fees than they received in credit.
Grothman said he believed the bill would likely pass the House, although it might not go through the Republican-controlled Senate. But advocates are “on the angels’ side,” Grothman said, and he hopes to see public support for the change build. There is no justification, he said, for the payday lender business model, which relies on poor and sometimes desperate customers.
“These people work hard for their money, and we shouldn’t continue to allow this business practice of scamming people who really don’t have the money to get scammed,” Grothman said.