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Fighting the debt trap of triple-digit interest rate payday loans

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Payday loans are supposed to be a short-term quick fix for those who can't get traditional credit. But the loans are rarely actually short-term, and borrowers frequently need to take out a second loan to pay off the first. Special correspondent Andrew Schmertz reports from South Dakota, where some state lawmakers are trying to cap triple-digit interest rates that many struggle to pay.

Субтитры

GWEN IFILL: But, first, payday lending isa $46 billion industry in the U.S. About 12 million Americans borrow more than$7 billion annually from over 22,000 storefronts. But the industry's practices have long beenunder scrutiny. Special correspondent Andrew Schmertz hasthe story from South Dakota, part of our ongoing reporting initiative Chasing the Dream: Povertyand Opportunity in America. ANDREW SCHMERTZ: Living paycheck to paycheckisn't easy. Sometimes, you have to come up with creativeways to relieve the stress. KRISTI MCLAUGHLIN, South Dakota: A good wayto just live in denial is just throw away your bills. I know I can't pay them anyway, so....

ANDREW SCHMERTZ: Kristi McLaughlin and herhusband, T.J., were getting by on T.J.'s salary as a manufacturing plant manager here in SiouxFalls, South Dakota, that was, until T.J. got sick. T.J. MCLAUGHLIN, South Dakota: I was working thenight shift, and I was on my feet a lot. And I had a couple of wounds start developingon my leg. And they were pretty small at first, and thenthey got infected and just started growing. ANDREW SCHMERTZ: When T.J. went to get treatment,the doctor said it would only take a day, but, in fact, he ended up missing a wholeweek of work. T.J..

MCLAUGHLIN: They ended up docking my pay. We ended up being short on bills. I panicked, so... ANDREW SCHMERTZ: So McLaughlin came here,a title loan place just a few miles from his home. He says the process was simple and quick. They inspected his car and then handed him$1,200 in cash. He agreed to pay $322 a month for a year. T.J. MCLAUGHLIN: I was making good money..

I didn't really foresee a problem paying itback at that time. ANDREW SCHMERTZ: But then his leg got worse,and he had to go back to the hospital for another week. KRISTI MCLAUGHLIN: And on Wednesday of thefollowing week, the H.R. person called from his job and fired him, and, on that day, wepretty much lost everything. ANDREW SCHMERTZ: But not the loan. After nine months, the total amount they owedgrew from $1,200 to over $3,000. That's an annual interest rate of more than300 percent. Title loans and payday loans are supposedto be short-term quick fixes for people who can't get traditional credit..

ACTRESS: Do you need fast cash? You have come to the right place. ANDREW SCHMERTZ: They use high-energy commercialsand bank-like storefronts to entice people to borrow money at triple-digit interest rates. The problem? They are rarely short-term. Borrowers frequently need to take out a secondloan to pay off the first one. It's called flipping. STEVE HICKEY (R), Former South Dakota StateLegislator: The average payday loan in the United States is flipped eight times..

And they are a debt trap that's intentionallymarketed to the financially unsophisticated, intending to lock them in on something thatthey can't pay back. ANDREW SCHMERTZ: Former state lawmaker SteveHickey tried to rein in the industry, which charges an average of 574 percent, with legislationto cap interest rates. But he could never get his bills out of committee. STEVE HICKEY: Just not much stomach in thelegislature, because the financial sector in our state is such a huge deal. There's millions and millions at stake. ANDREW SCHMERTZ: South Dakota has been theepicenter of high interest since the 1980s, when the state repealed laws capping ratesto attract jobs from credit card companies.

Like Wells Fargo and Citibank. STEVE HICKEY: The purpose at that time wasto bring in 400 Citibank jobs, not to bring in 400 percent interest rates. ANDREW SCHMERTZ: Hickey wasn't alone in recognizingthe problems created by these short-term loans. Steve Hildebrand runs Josiah's coffee shophere in Sioux Falls. He's seen the detrimental effects of thesehigh interest rates firsthand. STEVE HILDEBRAND, South Dakotans for ResponsibleLending: I have had employee after employee after employee over the last three years inthe coffee shop, going through horrible, horrible financial experiences, taking out these emergencyloans, and just getting into this terrible cycle of debt that is incredibly hard forthem to get out of..

ANDREW SCHMERTZ: Hildebrand, an openly gayDemocrat who worked on the Obama campaign, didn't have much in common with Hickey, aRepublican and conservative Christian pastor who has railed against homosexuality, butthey did see eye to eye on what they consider predatory lending. STEVE HICKEY: We created a campaign calledSouth Dakotans for Responsible Lending. Steve and I are chair and co-chair. It's brought people on the right and the lefttogether in a very healthy way. ANDREW SCHMERTZ: They decided to use a tacticthat was born right here in the Mount Rushmore state in 1898, the ballot initiative. REYNOLD NESIBA, South Dakotans for ResponsibleLending: And you're registered to vote in.

South Dakota? WOMAN: Yes. ANDREW SCHMERTZ: Reynold Nesiba is a volunteergathering signatures to put a measure on the ballot that would do what lawmakers couldnot: cap interest rates on all loans at 36 percent. REYNOLD NESIBA: And I feel so strongly aboutthis that I'm the treasurer of this campaign, so that's my name on the bottom. If you're registered to vote, I would loveto have your signature. ANDREW SCHMERTZ: The goal? To get well more than the 13,871 signaturesrequired to put the issue in front of voters.

Next November. With millions of dollars in revenue at stake,the lending industry is strongly opposed to any new regulation. Two-thirds of U.S. states allow some formof high-interest-rate loans, and when similar initiatives have sprung up in other states,the industry has fought back. Here in South Dakota, the lending industryis fighting back using a ballot initiative itself. STEVE HILDEBRAND: They were putting forwardan 18 percent rate cap in order to convince people they should sign that one, insteadof the 36, because 18 sounds better than 36, right?.

ANDREW SCHMERTZ: By that initiative comeswith a catch. It only caps rates at 18 percent -- quote-- "unless the borrower agrees to another rate in writing," meaning if the borrowerwants the loan, they have to agree to whatever terms the lender demands. STEVE HILDEBRAND: So, the 18 percent ratecap is just a fake cap. ANDREW SCHMERTZ: Teams of paid circulatorshave been out across the state gathering signatures for that petition. None were willing to speak with us on camera,and repeated requests for comment went unanswered. When asked about capping rates at 36 percent,the one payday lender who did speak with us was unequivocal..

CHUCK BRENNAN, CEO, Dollar Loan Center: It'sa kill-bill for the state. The entire lending industry would be out ofbusiness with it. ANDREW SCHMERTZ: Chuck Brennan, a Sioux Fallsnative, is the founder and CEO of Dollar Loan Center, a chain of more than 90 short-termlending stores, with 11 locations in South Dakota. CHUCK BRENNAN: We have a huge customer base. In South Dakota, we have had over 40,000 applicantsfor loans over the years. Over 20 percent of the state who is over 18has applied for a loan here, which really shows there's a need for the product out there. ANDREW SCHMERTZ: Further, Brennan says a ratecap will actually harm the people it is intended.

To help. CHUCK BRENNAN: It isn't like when the industrygoes out of business people are going to stop needing money. They're going to have to turn to online loans,illegal sources, and something that the state can't regulate. ANDREW SCHMERTZ: But Hickey says, in reality,there are plenty of ways to help people who need money without charging them triple-digitinterest. STEVE HICKEY: As an employer with employees,I would give a payday advance. I know Steve Hildebrand does at his coffeeshop. He will lend somebody money on their paycheckat zero percent interest, and maybe there.

Could even be regulation on that. Four times a year, it's an employee benefit. ANDREW SCHMERTZ: After months of hard work,the campaign gathered over 20,000 signatures for Hildebrand to deliver to the secretaryof state. But the opposing lender-supported campaignalso managed to gather enough signatures to get on the ballot. STEVE HILDEBRAND: The payday lenders are goingto spend millions of dollars on television trying to confuse voters and misrepresentour side. ANDREW SCHMERTZ: So, the fight's not over. Hildebrand has one year to convince SouthDakotans to vote for his interest rate cap..

In the meantime, T.J. ended up losing hisfight to save his leg. It was amputated six months after he losthis job. KRISTI MCLAUGHLIN: It needs to go at leastto there. ANDREW SCHMERTZ: T.J. and Kristi are now focusedon rehab, instead of the title loan. KRISTI MCLAUGHLIN: I told them to come andget the car. Take it. You know, our world has fallen out from underneathus, and if you want it that badly, come and get it. ANDREW SCHMERTZ: Over Thanksgiving, the lenderrepossessed their car. T.J..

MCLAUGHLIN: People get sick. And, you know, if it's serious enough, theycan lose everything. We lost everything in a matter of a week,it seems like. ANDREW SCHMERTZ: T.J. and Kristi may haveto find their way out of this devastation on their own. But they hope, by speaking out, they can atleast save other South Dakotans from becoming trapped in a nightmare of high interest rates. For the "PBS NewsHour," Andrew Schmertz inSioux Falls, South Dakota. Now Hari Sreenivasan takes a broader lookat the problems lower-income Americans face when it comes to getting the money they need..

HARI SREENIVASAN: South Dakota isn't the onlyplace where payday loans are such a big problem. While a few states have banned or imposedstrict regulations on these fringe lenders, they're ubiquitous in most of the country. In fact, there are more payday lending storefrontsthan there are Starbucks and McDonald's combined. In her book "How the Other Half Banks," MehrsaBaradaran explores the booming industry providing financial services to the poor at exorbitantcosts and offers some more equitable solutions. Thanks for joining us. So, why -- where is this gap created? And why isn't there an incentive for all banksto reach out to all people with money? MEHRSA BARADARAN, Author, "How the Other HalfBanks": The gap is fairly new..

So, starting in the 1980s, a lot of communitybanks started shutting down branches in lower-income areas, inner-city neighborhoods, areas wheretheir profit margins were lower than in other areas. And so part of it is, it's higher cost tolend to someone or to take a small deposit than it is to get a big deposit. Right? Your overhead is the same whether you're,you know, taking in $100,000 vs. taking in $500, but your revenue off of that $100,000is much higher than it is off of that small deposit. And so these banks started leaving these areas..

And part of it is that the government deregulatoryforces allowed them to merge and form these huge conglomerates such as Bank of America. So, as these banks leave, they leave thisvoid for banking service. And this is a void that quickly is filledby these fringe lenders, so payday loans, check cashing. HARI SREENIVASAN: Now, when you go throughcertain cities, just like there are food deserts where you don't have a grocery store, it seemslike there are almost bank deserts, where it's populated primarily with these lendersthat you're talking about. How much money is there to be made? MEHRSA BARADARAN: It's an $89 billion industryyearly..

And it doesn't seem that way. So, when you go into these neighborhoods,these check cashers or payday lenders, they seem like neighborhood joints. But they're really sort of multinational corporations. They're large, very profitable organizations. And they have this, what I call a facade ofinformality, right? So it seems as though, look, they speak yourlanguage. They're in your neighborhood, but, really,behind them, there is a lot of bank financing. These are very sort of corporate, big, bigfirms. HARI SREENIVASAN: These companies are goingto say, look, I'm taking a greater risk..

This is a person that is not as creditworthyas someone who maybe walks into a Bank of America with a much larger amount of assets,right, so shouldn't I be able to charge a higher interest rate to get them this moneyfast? MEHRSA BARADARAN: It is certainly a higherrisk to lend to someone who's low-income. However, there's a lot of studies to showthat the price that they're actually charging isn't the cost of the loan. It's also fairly misleading when you compareit to the credit markets that the middle class and higher income have access to. And one of the big points of the book is,even assuming that this is a market price that they're charging and it is the cost ofcredit because of the risks and the defaults,.

Et cetera, the rest of us don't pay marketprices for credit. The credit markets, whether it's for our mortgages,our student loans, any sort of bank credit you get is heavily subsidized by the federalgovernment. HARI SREENIVASAN: The book is called "Howthe Other Half Banks." Mehrsa Baradaran, thanks so much for joiningus. MEHRSA BARADARAN: Thank you.

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