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

GWEN IFILL: But, first, payday lending is a $46 billion industry in the US

About 12 million Americans borrow more than $7 billion annually from over 22,000 storefronts But the industry's practices have long been under scrutiny Special correspondent Andrew Schmertz has the story from South Dakota, part of our ongoing reporting initiative Chasing the Dream: Poverty and Opportunity in America ANDREW SCHMERTZ: Living paycheck to paycheck isn't easy Sometimes, you have to come up with creative ways to relieve the stress

KRISTI MCLAUGHLIN, South Dakota: A good way to just live in denial is just throw away your bills I know I can't pay them anyway, so ANDREW SCHMERTZ: Kristi McLaughlin and her husband, T

J, were getting by on TJ's salary as a manufacturing plant manager here in Sioux Falls, South Dakota, that was, until TJ

got sick TJ MCLAUGHLIN, South Dakota: I was working the night shift, and I was on my feet a lot And I had a couple of wounds start developing on my leg

And they were pretty small at first, and then they got infected and just started growing ANDREW SCHMERTZ: When TJ went to get treatment, the doctor said it would only take a day, but, in fact, he ended up missing a whole week 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

TJ MCLAUGHLIN: I was making good money I didn't really foresee a problem paying it back 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 the following week, the HR person called from his job and fired him, and, on that day, we pretty much lost everything ANDREW SCHMERTZ: But not the loan After nine months, the total amount they owed grew from $1,200 to over $3,000

That's an annual interest rate of more than 300 percent Title loans and payday loans are supposed to 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 commercials and 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 second loan to pay off the first one It's called flipping STEVE HICKEY (R), Former South Dakota State Legislator: The average payday loan in the United States is flipped eight times And they are a debt trap that's intentionally marketed to the financially unsophisticated, intending to lock them in on something that they can't pay back ANDREW SCHMERTZ: Former state lawmaker Steve Hickey tried to rein in the industry, which charges an average of 574 percent, with legislation to cap interest rates

But he could never get his bills out of committee STEVE HICKEY: Just not much stomach in the legislature, 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 the epicenter of high interest since the 1980s, when the state repealed laws capping rates to attract jobs from credit card companies like Wells Fargo and Citibank STEVE HICKEY: The purpose at that time was to bring in 400 Citibank jobs, not to bring in 400 percent interest rates

ANDREW SCHMERTZ: Hickey wasn't alone in recognizing the problems created by these short-term loans Steve Hildebrand runs Josiah's coffee shop here in Sioux Falls He's seen the detrimental effects of these high interest rates firsthand STEVE HILDEBRAND, South Dakotans for Responsible Lending: I have had employee after employee after employee over the last three years in the coffee shop, going through horrible, horrible financial experiences, taking out these emergency loans, and just getting into this terrible cycle of debt that is incredibly hard for them to get out of ANDREW SCHMERTZ: Hildebrand, an openly gay Democrat who worked on the Obama campaign, didn't have much in common with Hickey, a Republican and conservative Christian pastor who has railed against homosexuality, but they did see eye to eye on what they consider predatory lending

STEVE HICKEY: We created a campaign called South Dakotans for Responsible Lending Steve and I are chair and co-chair It's brought people on the right and the left together in a very healthy way ANDREW SCHMERTZ: They decided to use a tactic that was born right here in the Mount Rushmore state in 1898, the ballot initiative REYNOLD NESIBA, South Dakotans for Responsible Lending: And you're registered to vote in South Dakota? WOMAN: Yes

ANDREW SCHMERTZ: Reynold Nesiba is a volunteer gathering signatures to put a measure on the ballot that would do what lawmakers could not: cap interest rates on all loans at 36 percent REYNOLD NESIBA: And I feel so strongly about this that I'm the treasurer of this campaign, so that's my name on the bottom If you're registered to vote, I would love to have your signature ANDREW SCHMERTZ: The goal? To get well more than the 13,871 signatures required 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 US states allow some form of 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 industry is fighting back using a ballot initiative itself STEVE HILDEBRAND: They were putting forward an 18 percent rate cap in order to convince people they should sign that one, instead of the 36, because 18 sounds better than 36, right? ANDREW SCHMERTZ: By that initiative comes with a catch

It only caps rates at 18 percent — quote — "unless the borrower agrees to another rate in writing," meaning if the borrower wants the loan, they have to agree to whatever terms the lender demands STEVE HILDEBRAND: So, the 18 percent rate cap is just a fake cap ANDREW SCHMERTZ: Teams of paid circulators have 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's a kill-bill for the state The entire lending industry would be out of business with it ANDREW SCHMERTZ: Chuck Brennan, a Sioux Falls native, is the founder and CEO of Dollar Loan Center, a chain of more than 90 short-term lending stores, with 11 locations in South Dakota CHUCK BRENNAN: We have a huge customer base In South Dakota, we have had over 40,000 applicants for loans over the years

Over 20 percent of the state who is over 18 has applied for a loan here, which really shows there's a need for the product out there ANDREW SCHMERTZ: Further, Brennan says a rate cap will actually harm the people it is intended to help CHUCK BRENNAN: It isn't like when the industry goes 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-digit interest

STEVE HICKEY: As an employer with employees, I would give a payday advance I know Steve Hildebrand does at his coffee shop He will lend somebody money on their paycheck at 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 secretary of state

But the opposing lender-supported campaign also managed to gather enough signatures to get on the ballot STEVE HILDEBRAND: The payday lenders are going to spend millions of dollars on television trying to confuse voters and misrepresent our side ANDREW SCHMERTZ: So, the fight's not over Hildebrand has one year to convince South Dakotans to vote for his interest rate cap In the meantime, T

J ended up losing his fight to save his leg It was amputated six months after he lost his job KRISTI MCLAUGHLIN: It needs to go at least to there ANDREW SCHMERTZ: T

J and Kristi are now focused on rehab, instead of the title loan KRISTI MCLAUGHLIN: I told them to come and get the car Take it You know, our world has fallen out from underneath us, and if you want it that badly, come and get it

ANDREW SCHMERTZ: Over Thanksgiving, the lender repossessed their car TJ MCLAUGHLIN: People get sick And, you know, if it's serious enough, they can lose everything

We lost everything in a matter of a week, it seems like ANDREW SCHMERTZ: TJ and Kristi may have to find their way out of this devastation on their own But they hope, by speaking out, they can at least save other South Dakotans from becoming trapped in a nightmare of high interest rates

For the "PBS NewsHour," Andrew Schmertz in Sioux Falls, South Dakota Now Hari Sreenivasan takes a broader look at the problems lower-income Americans face when it comes to getting the money they need HARI SREENIVASAN: South Dakota isn't the only place where payday loans are such a big problem While a few states have banned or imposed strict regulations on these fringe lenders, they're ubiquitous in most of the country In fact, there are more payday lending storefronts than there are Starbucks and McDonald's combined

In her book "How the Other Half Banks," Mehrsa Baradaran explores the booming industry providing financial services to the poor at exorbitant costs 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 banks to reach out to all people with money? MEHRSA BARADARAN, Author, "How the Other Half Banks": The gap is fairly new So, starting in the 1980s, a lot of community banks started shutting down branches in lower-income areas, inner-city neighborhoods, areas where their profit margins were lower than in other areas And so part of it is, it's higher cost to lend 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 $100,000 is 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 deregulatory forces allowed them to merge and form these huge conglomerates such as Bank of America So, as these banks leave, they leave this void for banking service

And this is a void that quickly is filled by these fringe lenders, so payday loans, check cashing HARI SREENIVASAN: Now, when you go through certain cities, just like there are food deserts where you don't have a grocery store, it seems like there are almost bank deserts, where it's populated primarily with these lenders that you're talking about How much money is there to be made? MEHRSA BARADARAN: It's an $89 billion industry yearly 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 of informality, right? So it seems as though, look, they speak your language They're in your neighborhood, but, really, behind them, there is a lot of bank financing These are very sort of corporate, big, big firms

HARI SREENIVASAN: These companies are going to say, look, I'm taking a greater risk This is a person that is not as creditworthy as 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 money fast? MEHRSA BARADARAN: It is certainly a higher risk to lend to someone who's low-income However, there's a lot of studies to show that the price that they're actually charging isn't the cost of the loan It's also fairly misleading when you compare it 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 of credit because of the risks and the defaults, et cetera, the rest of us don't pay market prices 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 federal government HARI SREENIVASAN: The book is called "How the Other Half Banks" Mehrsa Baradaran, thanks so much for joining us MEHRSA BARADARAN: Thank you