student loan lenders

gwen ifill: but, first, payday lending isa $46 billion industry in the u.s. about 12 million americans borrow more than $7 billionannually 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 creative ways 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 workingthe night 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 then they got infected and just startedgrowing. 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 mypay. 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 monthfor 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 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 ninemonths, the total amount they owed grew from $1,200 to over $3,000. that's an annual interestrate of more than 300 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 cometo 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 second loanto 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. andthey 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 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'smillions 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 these high 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 broughtpeople on the right and the left together

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'reregistered to vote, i would love to have your signature. andrew schmertz: the goal? to get well morethan 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 toany 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 industry is fighting backusing 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 toanother rate in writing," meaning if the borrower wants the loan, they have to agree to whateverterms 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 speakwith 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 of business 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 applicants

for loans over the years. over 20 percentof the state who is over 18 has applied for a loan here, which really shows there's aneed 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 turnto 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 coffee shop. he willlend somebody money on their paycheck at zero percent interest, and maybe there could evenbe 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 campaign also managed to gather enough signaturesto 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 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 sixmonths after he lost his 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 underneath us, and ifyou want it that badly, come and get it. andrew schmertz: over thanksgiving, the lenderrepossessed their car. t.j. mclaughlin: people get sick. and, youknow, if it's serious enough, they can lose

everything. we lost everything in a matterof 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 at least save other south dakotans from becoming trapped in a nightmare of highinterest 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 storefronts than 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? andwhy isn't there an incentive for all banks to 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 costto lend to someone or to take a small deposit than it is to get a big deposit. right? youroverhead is the same whether you're, you know, taking in $100,000 vs. taking in $500, butyour 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 thesehuge 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 filled by 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'rereally 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 your language. they're inyour neighborhood, but, really, behind them, there is a lot of bank financing. these arevery sort of corporate, big, big firms. hari sreenivasan: these companies are goingto say, look, i'm taking a greater risk. this is a person that is not as creditworthy assomeone 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 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 fairlymisleading when you compare it to the credit

markets that the middle class and higher incomehave 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.