Payday Loan Times

South Dakota Sen. Tim Johnson’s re-election campaign has raked in almost $20,000 so far this year from people who earn their living making high-interest loans to cash-strapped borrowers, Federal Election Commission records show.

Individuals employed by nine fast payday advance lending companies from across the country donated a total of $19,500 to Johnson’s campaign committee in the first three months of the year, campaign finance records show. That’s on top of the $37,600 that they and others in the industry donated to the Democratic senator last year.

The industry donated $500 to South Dakota’s lone House member, Democrat Stephanie Herseth, last year and no money during the past two years to Republican Sen. John Thune.

Johnson, who is recuperating from a December brain hemorrhage, is a member of the Senate banking committee, which has jurisdiction over no fax cash loan lenders. He is expected to seek a third term next year. In all, his campaign raised $633,208 in the first quarter of 2007.

Consumer groups say the donations are troubling because payday lenders trap low-income borrowers in a cycle of debt, a practice the groups want Congress to stop. Some of the lenders formed business relationships with small South Dakota banks to avoid state usury laws. South Dakota does not cap interest rates. Federal regulators put a stop to the practice last year.

Last year, Johnson criticized a proposal to impose a 36 percent cap on interest rates that guaranteed payday loan lenders charge members of the military. The Defense Department asked for the cap because thousands of military personnel had lost their security clearances because they were so heavily in debt to payday lenders. The proposal was incorporated into the 2007 defense authorization bill and became law.

“If we are to eliminate payday lending altogether or make it unusable, the question is, ‘Who fills the void?’ ” Johnson, whose son, Brooks, was in the Army at the time, asked during a hearing. “We need to make sure we don’t have unintended consequences that are worse than what we have now.”

Cash advance lenders, who often charge 390 percent to 780 percent annual interest, are legalized loan sharks, said Ed Mierzwinsky, consumer advocate for U.S. Public Interest Research Group.

“They are preying on American consumers,” Mierzwinsky said. “Congress cracked down on them when it came to the military, and now the industry is gearing up to make sure Congress doesn’t take the next logical step of protecting everyone.”

Johnson does not consider providers of no faxing payday loans to be loan sharks, his spokeswoman Julianne Fisher said. The lenders’ fees, while expensive on an annual basis, are comparable to what banks charge customers for bouncing a check or taking out a credit card cash advance, she said.

Steven Schlein, executive vice president of the Community Financial Services Association, said Johnson has been a reasonable and fair voice for the group on the Senate banking committee. Industry critics are elitist, he said.

Critics “don’t offer people living paycheck to paycheck any alternatives,” Schlein said. “Any alternatives they list are the kinds of things our customers are trying to avoid, like a friend or a family member.”

The problem with bad credit cash loans is that many borrowers repeatedly roll them over and end up paying far more than the initial fees, said Jean Ann Fox, director of consumer protection for the Consumer Federation of America. In states where data is collected, the average payday loan customer borrows eight times a year, Fox said.

“This isn’t a one-time your car broke down and you go fix it,” Fox said. “It’s perpetual debt for a lot of people.”