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Payday lending restrictions

Published (3/11/2010)
By Nick Busse
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Payday loans are tightly regulated in Minnesota, but some companies have found a loophole that lets them bypass rules meant to protect consumers. Rep. Jim Davnie (DFL-Mpls) intends to close that loophole.

Payday loans are short-term, high-interest consumer loans similar to cash advances on credit cards. In 1995, the Legislature enacted a law meant to protect consumers from what critics say are exorbitant interest rates often connected to such loans.

“We set the white lines on the road and allowed businesses then to play within those lines,” Davnie said.

Although most of the state’s 28 licensed payday lenders operate within those lines, Davnie said three companies have found an “off-ramp.” By operating as “industrial loan and thrift companies” — a different class of financial institution — they can charge much higher interest rates without technically breaking the law.

Davnie sponsors HF3170 that would close the loophole. The House Labor and Consumer Protection Division approved the bill March 5 and referred it to the House Commerce and Labor Committee.

Ron Elwood, a staff attorney with Legal Aid, said the three “loophole lenders” charge economically struggling Minnesotans roughly $6 million a year in interest and fees beyond what is allowed under payday lending statutes.

“These are the most financially vulnerable folks,” Elwood said. “So that’s $6 million that should have been in those families’ pockets all along.”

He added that none of the state’s 16 other licensed industrial loan and thrift companies engage in payday lending.

Lobbyists representing the payday lending industry testified in opposition to the bill, arguing it would reduce consumer choice. Paul Cassidy, representing Payday America, called the bill “a solution looking for a problem,” and suggested it would merely push consumers to seek out similar loans in other states or on the Internet.

“We’ve made a business decision to offer our customers flexibility and choice in the products that they can access when they’re in need,” Cassidy said.

A companion,  SF2837, sponsored by Sen. Kevin Dahle (DFL-Northfield), awaits action by the Senate Commerce and Consumer Protection Committee.

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