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.