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LRBact405

LRBact405

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Published by sara_schulz_1
Another great overview of the new Pay Day Rules that went into affect June 1st.
Another great overview of the new Pay Day Rules that went into affect June 1st.

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Published by: sara_schulz_1 on Jun 11, 2011
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03/01/2014

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 from the Legislative Reference Bureau
 Legislative Briefs
Legislative Brief 10−3
November 2010
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
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.
LEGISLATIVE HISTORY
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
Reference Desk: (608) 266-0341Web Site:www.legis.state.wi.us/lrb 
 
 
2 −LB−10−3
lation language, leaving a single sentence thateffectively prohibits title loans entirely.
MAJOR PROVISIONS OF WISCONSINACT 405Payday Loan Licensing
Prior to Act 405, payday lenders were onlyrequired to be licensed lenders to operate inWisconsin. A licensed lender is any lendinginstitution (with the exception of banks andsimilar institutions described below) thatcharges a finance charge of more than 18% peryear. Under the act, institutions offeringpayday loans must now be specifically licensedas payday lenders by the Wisconsin Depart-ment of Financial Institution’s Division of Banking (“the Division”). This license must beobtained before originating or servicing anypayday loan involving a Wisconsin resident,whether the loan is transacted face-to-face, orthrough the telephone, Internet, mail, or othermeans. Banks, savings banks, savings and loanassociations, trust companies, and credit unionsare all specifically exempted from both thelicensed lender requirements and the newpayday lender licensing requirement.A payday lender must apply for a paydaylending license by submitting an application tothe Division along with a $300 fee for the inves-tigation of the application, and a $500 annuallicensing fee. The application also contains anacknowledgement that the lender is subject tothe requirements of Wisconsin Statutes Chapter427, which regulates debt collection. Finally,license applicants must file and maintain abond of at least $5,000 for each license theyreceive as a further acknowledgement that theywill adhere to Wisconsin’s payday lendinglaws.Under Act 405, payday lending licenses arenot transferable, and an individual or institu-tion must obtain a license for each place of busi-ness where payday lending or payday loan ser-vicing will be conducted. Lenders must alsonotify the Division if the address of such a placeof business changes, and a new, amendedlicense will be issued to reflect the new address.If the change of address results in the place of business moving from one city, village, or townto another, then the license cannot be amended,and a new license must be obtained for the newlocation. The Division also has authority to sus-pend or revoke payday lending licenses undercertain circumstances, including applicationmisrepresentations, violations of various laws,or failure to pay the annual license fee.
Payday Loan Places of Business
Act 405 also regulates the places of businessfrom which payday lenders operate. As men-tioned above, payday lenders must obtainpayday lending licenses for each of their placesof business. The law then requires that theselicenses be conspicuously posted in each placeof business, or in a conspicuous location on aWeb site in the case of lenders who operate overthe Internet, so that they can be viewed by con-sumers. Payday lenders are also required tomaintain all books and records related topayday lending, either in each of their licensedplaces of business, or in one central location aslong as that location is also a licensed paydaylending place of business. This allows the Divi-sion to efficiently review payday lenders’records to ensure compliance with the statutesat either the place of business where a loan wasoriginated or serviced, or at a single locationthat houses all of the records for a number of places of business.The regulation of payday lending places of business is not limited to on-site licenses andrecords. Act 405 also regulates the physicallocation of payday lending businesses, andwhat services may be offered at such locations.Under the new law, a payday lender may notoperate in a Wisconsin city unless it receives apermit to do so from the city council. A citycouncil cannot issue such a permit if the paydaylending place of business would be locatedwithin 1,500 feet of another payday lender, orwithin 150 feet of an area zoned for single-fam-ily or two-family residential use. A city councilmay adopt a zoning ordinance that zonespayday lenders more strictly, but it is not autho-rized to allow less strict zoning of payday lend-
 
 
− 3 LB−10−3
ing places of business. The act contains a similarprovision for zoning in unincorporated areas of counties, and applies the city requirements toany village or town that exercises village pow-ers.Payday lenders are only authorized to con-duct payday loan business at their places of business unless they request and receive writ-ten authorization from the Division to conductother business. With proper prior authoriza-tion, a payday lending place of business canalso offer one or more of the following services,whether offered by the licensee or a third party:1) a currency exchange service; 2) a check sellingbusiness; 3) a loan business; or 4) a sales financecompany.
Regulation of Payday Loans
Act 405 establishes additional regulationson the actual practice of payday lending, fromthe issuance of loans, to the terms of those loans,to the process of repayment. At the time apayday loan is issued the lender must makevarious disclosures regarding the total cost of the loan, the annual percentage rate of intereston the loan, and the borrower’s rights andobligations. Lenders must also ensure, using adatabase prepared by the Division, that no bor-rower has outstanding aggregate debt of morethan $1,500 or 35% of the borrower’s grossmonthly income, whichever is less, before issu-ing a new payday loan. Following the issuanceof a payday loan, as mentioned in the disclo-sures above, borrowers have until the close of the following business day to rescind theiracceptance of the loan agreement. In the case of a lender that operates on a 24-hour basis, suchas an Internet-based lender, the close of the fol-lowing business day will be 5:00 p.m. If a bor-rower rescinds acceptance of a loan agreement,then the principal must be returned immedi-ately and the lender may not charge the bor-rower any fee or penalty.The act also regulates the terms and condi-tions that a payday lending agreement maycontain. The requirements of the WisconsinConsumer Act (“the WCA,” Chapters 421through 427 of the Wisconsin Statutes) continueto apply to payday loans, except in those caseswhere the WCA and the payday lending statuteconflict, in which case the latter controls. Inaddition to the standard WCA requirementsapplicable to all loans, payday lenders may notcharge any interest after the maturity date of apayday loan, although they are free to charge asmuch interest as they like for the repaymentperiod of the loan. A payday lender may notcharge any penalty or fee for prepayment, latepayment, or default on a payday loan, thoughlenders are permitted to implement a servicecharge of not more than $15 for a personal checor funds transfer that is denied due to insuffi-cient funds.Finally, the act regulates the repayment of payday loans in some situations. Lenders maynot prohibit prepayment of payday loans, andif a borrower does prepay before the date of maturity, a lender must return the unearnedportion of the interest assessed on the loan. If aborrower is unable to repay a payday loan at thedate of maturity, then the lender must allow theborrower the option of repayment of any out-standing balance in four equal installmentswith due dates coinciding with pay periods atthe borrowers place of employment. A bor-rower is permitted to repay a payday loan withthe proceeds of a second payday loan, but this“rollover” can only occur once, so the secondloan may not be paid off with the proceeds of athird payday loan.
Criminal Penalties and Consumer Lawsuits
Act 405 makes a violation of the paydaylending statute a misdemeanor punishable by afine of not more than $500, imprisonment fornot more than six months, or both. Any person,partnership, corporation, or the officers oremployees thereof may be liable for such viola-tions.The act also creates a private cause of actionthat allows a borrower to recover damages of $250 or the amount of the loan, whichever isgreater, from any lender who violates thepayday lending statute.If a lender is not licensed to originate or ser-vice payday loans but does so anyway, the

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