St. Paul, Minnesota — Today the Minnesota House of Representatives passed HF 2293, a bill chief authored by state Representative Joe Atkins (DFL – Inver Grove Heights) to limit payday lending.
“Payday loans” are very short-term loans made with almost no underwriting (checking of borrower’s credit and ability to repay). In lieu of checking for credit-worthiness, payday lenders get a post-dated check from the borrower, or authorization to withdraw money from the borrower’s bank account at the nearest time when the borrower expects to have money to repay – usually payday. On the loan’s due date (payday loans are almost always single-payment), the borrower either repays the loan, the lender cashes the check, or – very commonly – the lender will allow the customer to repay the loan with a new payday loan.
Organizations ranging from the Joint Religious Legislative Coalition to the U.S. Department of Defense have all concluded that payday lenders tend to trap a majority of their customers in a vicious cycle of debt.
The Consumer Financial Protection Bureau (CFPB) recently studied payday loan transactions, and found that almost half of the borrowers took out 11 or more payday loans in a 12-month period; 14 percent of the borrowers made 20 or more. With frequency comes the tendency to repay one loan with another: CFPB found that borrowers taking 7-10 loans opened roughly half of them on the same day a prior loan “closed;” for borrowers with 11-19 loans, it was about 65 percent; for the 20+ borrowers, close to 70 percent.
Rep. Atkins said Minnesotans — especially lower-income Minnesotans — should be protected from these types of predatory payday lending.
“Poor people shouldn’t be treated as second class citizens,” said Rep. Atkins. “Every other income group in Minnesota can access loans through a system that includes reasonable interest rates and consumer protections. Minnesotans shouldn’t be subjected to 391 percent interest rates because they’re low-income and because lenders found a loophole.”
Payday lenders do not charge interest on their loans, but instead charge fees generally ranging from $10 to $20 per $100 borrowed. For a customer taking out a one-time short-term loan, the price is reasonable for getting a loan with no credit check. When the borrowing extends to a longer-term, however, the resulting cost is much higher. To put it in the context of other loan products, a $15 fee per $100 borrowed on a 14-day loan equates to an Annual Percentage Rate (APR) of 391 percent.
This 391 percent APR is from the maximum fees that can be charged in Minnesota’s existing short-term lending law, adopted in 2009. The biggest payday-lending companies, like Payday America and UnLoan, have formed as industrial loan and thrift companies, and by doing, so are not subject to those caps. These types of lenders make up 75 percent of the payday loans opened in Minnesota.
HF 2293 aims to remove all lender incentives to profit from chain borrowers, and ensure they pay some attention to their customers’ financial situations:
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If this bill becomes law, Minnesota payday lenders will have to check the borrower’s credit history and confirm that their borrower has not already committed 41 percent or more of their income with obligations for housing, other loans and credit, or child support/alimony.
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Payday lenders would also be required to enter all new loans into the credit reporting system, too, making those debts show up on the reports pulled by payday lenders.
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The bill would also help end the cycle of debt that has trapped many receiving payday loans. The bill bars payday lenders from lending to borrowers who have already taken out 4 payday loans in the prior 12 months, or have been in debt on payday loans for more than 90 days out of the last 365.
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The lender is not allowed to make a loan at all if they can’t verify the borrower’s past history.
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Another provision would require payday lenders to inquire whether their borrower is on active-duty military service, or is the spouse or dependent of someone serving on active duty, and if so, they cannot charge more than the 36 percent APR for a loan (roughly $15 per $1,000 borrowed). The 36 percent cap is in a federal law adopted after the Department of Defense studied the industry’s effect on junior soldiers.
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The bill also strips payday lenders of the ability to roll “costs” into their loans at any chosen rate, but must follow the rate schedule for other “small loans,” which are around 10 percent of the loan amount and diminish with larger loan amounts.
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The bill prohibits industrial loan and thrift companies (a common registration for companies offering payday loans) from making payday loans, limiting all short-term lending to the $350 “consumer small loan” option under Section 47.60.
“Minnesotans who are struggling and need one of these loans shouldn’t be placed in a never-ending cycle of crushing debt and hardship,” added Rep. Atkins. “This bill offers reasonable protections that everyone else in the loan business must also follow.”
Senator Jeff Hayden (DFL – Minneapolis) is the chief author of the Senate version of the bill.