GWEN IFILL: But, first, payday lending is
a $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 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 T.J.’s salary as a manufacturing plant manager here in Sioux
Falls, South Dakota, that was, until T.J. got sick. T.J. 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 T.J. 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. T.J. 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 H.R. 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 U.S. 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. T.J. 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: T.J. 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.