from the Legislative Reference Bureau
Legislative Brief 10−3
PAYDAY LOANS − 2009 WISCONSIN ACT 405
On May 18, 2010, Governor Jim Doylesigned 2009 Senate Bill 530 into law, enacted asWisconsin Act 405, which regulates the paydaylending business.The act, which takes effect on January 1,2011, makes the following changes:
Requires payday lenders to obtain specialpayday lending licenses;
Regulates where payday lending businessesmay be located;
Creates new regulations for payday lendersand payday loans;
Directs the Division of Banking to overseepayday lending practices; and
Eliminates automobile title loans in Wiscon-sin.
Payday lending refers generally to thepractice of issuing small, short-term loans thatoften carry high interest and finance charges topeople who would not otherwise be able orwilling to borrow money under a conventionalloan. These payday loans, also referred to asdeferred deposit loans, are most often madeagainst a borrower’s personal check or auto-matic fund transfer agreement, which will becashed or completed at the end of the loanperiod, ensuring that the lender has some secu-rity on the loan. Typically, a payday lender willissue a loan upon acceptance of a borrower’scheck or fund transfer agreement made out forthe balance of the principal plus an additionalamount of money that will represent the inter-est on the loan. For example, a lender may issuea $100 loan upon receiving a check or fundtransfer agreement in the amount of $115 fromthe borrower, then at the end of a brief loanperiod the lender will cash the check or com-plete the fund transfer and be repaid with inter-est. Because these are such short-term loans theinterest, when converted to an annual percent-the example above, $15 on a two-week $100loan would work out to an APR of 390%. Addi-tionally, if a borrower does not have enoughmoney in his or her bank account to cover thecheck or fund transfer agreement when it comesdue, he or she will also likely face high penaltyfees from the payday lender. The interest andfees charged by payday lenders can cause small,short-term loans to snowball into largeamounts of debt very quickly. Because paydayloan borrowers are often low-income, this debt,and the availability of more short-term credit topay it off, can become a vicious cycle of borrow-ing and defaulting. Act 405 was adopted toalleviate concerns over this situation by increas-ing regulation and oversight of such loans.
2009 Senate Bill 530 was introduced by Sen-ators Sullivan, Hansen, Miller, Lehman, andRobson, and cosponsored by RepresentativeFields. The bill, as originally introduced, wouldhave prohibited payday lenders from issuingloans to individuals who had already incurreda total of $900 or more in outstanding paydayloan liability from any licensed lender. Thisproved to be a contentious issue, and the capwas eventually increased to $1,500 or 35% of aborrower’s gross monthly income in SenateSubstitute Amendment 1.The bill, as passed by the legislature, per-mitted lenders to assess interest at a rate of upto 2.75% on loans that were not paid at maturity.The governor used his partial veto power toprohibit any interest on loans that are not paidat maturity.The original senate bill did not seek to regu-late title loans in any way. Assembly Amend-ment 2 added a significant number of title loanregulations to the proposal and was adopted tobecome part of the final bill passed by the legis-lature. The governor used his partial vetoage rate (APR), can be exorbitant. In the case of power to delete almost all of the title loan regu-
Prepared by Jason Anderson, Legislative Analyst