Reining in short-term lenders

Short-term lenders in Minnesota may have to look at a borrower’s ability to repay a loan and cap the number of loans a person can take per year.

The House Commerce and Consumer Protection Finance and Policy Committee on Wednesday heard HF2293, sponsored by Rep. Joe Atkins (DFL-Inver Grove Heights). It would require short-term lenders to determine and document whether a potential borrower has the ability to repay a loan, limit a borrower’s debt-to-income ratio to 41 percent, and cap the number of short-term loans at four per year.

The bill passed on a 12-7 roll-call vote and now moves to the House floor. There is no Senate companion.

Atkins asked committee members to think about the highest interest rate they’d ever gotten on a loan. Numbers of 12 percent and 18 percent were mentioned by members.

“What we’re talking about here are rates in excess of 391 percent,” he said. “Those who take out payday loans should not be treated like second-class citizens.”

Atkins added that when a payday lending bill came through the House a few years ago, he voted for it because it was intended for these loans to be for emergency use and it appeared that the lender took all the risk because of high default rates. Currently, the default rate on short-term loans in Minnesota is 2 percent. However, there are exceptions.

Renee Bergeron from Duluth took out a payday loan in 2005 to afford Christmas presents for her children. She didn’t realize how high her interest rate was, and subsequently took out multiple loans, rolling her current loans together. At one point, she said she was paying $600 in interest per month for her short-term loans.

“I ended up in a shelter because I couldn’t pay my rent,” she said. “I’m now in transitional housing, but this happened in 2005. If I’d had other options, I never would have done it.” 

Stuart Tapper, vice president of short-term lender UnLoan Corp., said that the bill would kill short-term lending in Minnesota, and added that borrowers cannot take out multiple loans at one time from regulated lenders. They must repay an outstanding loan before they are allowed to take out another.

“If people are rolling their loans, they are obviously using unregulated sources,” he said.

For example, Internet companies or loan sharks would be unregulated. Tapper also added that capping the number of loans per year at four was an arbitrary number.

Atkins said that the average number of loans short-term borrowers take per year is 10 and an UnLoan Corp. borrower averages 16 per year.

“There are emergencies that arise,” Atkins said. “But how many times? “