Stop Payday Lenders from Extracting Millions Out of MN Communities
The payday loan industry engages in a vicious predatory cycle that traps financially-stressed Minnesotans in long-term debt and extracts millions of dollars from our communities each year. Minnesotans are demanding stricter regulations that would stop predatory lending practices, triple digit percentage rates, and other abuses.
There is widespread public support for a set of bills currently moving through the state legislature to do just that. Over 70 percent of Minnesota voters agree that consumer protections for payday loans in Minnesota need to be strengthened, according to a Public Policy Polling survey Minnesotans for Fair Lending recently commissioned.
Minnesotans for Fair Lending includes 34 organizations representing seniors, social service providers, labor, faith leaders, and credit unions with considerable electoral sway. It’s pushing hard for HF 2293 (Atkins), which recently passed the Minnesota House on a 73-58 vote, and SF 2368 (Hayden), which is expected to come up for a Senate vote in the near future. The proposed legislation requires the payday loan industry to adopt some basic underwriting standards, and to limit the amount of time a lender could hold a customer in triple-digit APR indebtedness.
Payday loans carry triple-digit annual interest rates, are due in full on a borrower’s next payday, require direct access by the payday lender to a borrower’s bank account, and are made with little or no regard for a borrower’s ability to repay the loan. The typical payday loan in Minnesota carries a 273 percent annual percentage rate (APR).
Poll results show 75 percent of voters support changing state law to require payday lenders to ensure that a loan is affordable in light of a borrower’s income and expenses. Nearly 70 percent of voters support changing Minnesota law to limit payday loan indebtedness to no more than 90 days a year. The poll included 530 Minnesota voters, with a margin of error of +/- 4.3 %.
According to Minnesota Department of Commerce data, the typical payday loan borrower takes out ten loans per year. After 10 loans spanning 20 weeks an individual will pay $397.90 in charges for a typical $380 payday loan. In 2012, more than one in five borrowers in Minnesota was stuck in over 15 payday loan transactions.
“The predatory business model of payday lenders opens a cycle of repeat borrowing with fees,” said Arnie Anderson, executive director of the MN Community Action Partnership. “Community Action agencies throughout the state see clients every day who are caught in the debt trap from payday loans. From the first loan, they were not able to meet monthly expenses so the payday loan with its fees only got them deeper in debt.”
Cherrish Holland, a Lutheran Social Service financial counselor based in Willmar testified in support of reform legislation in both House and Senate committee hearings. Holland stated, “Our clients report that this debt trap of multiple payday loans leads to even more financial stress and often makes the financial situation worse,” said “The impact on families can be devastating and we need reforms now.”
In addition to creating more financial stress in consumers’ lives, payday lending extracts millions of dollars from Minnesota communities that would be spent more productively if available for groceries, rent, and other household goods.
“In 2012 alone, 84 storefront payday lenders extracted a total of over $11.4 million statewide in fees and charges,” said Tracy Fischman, executive director of AccountAbility Minnesota. “The payday debt cycle is responsible for the majority of these fees. The fees too often prevent Minnesota borrowers from being able to pay their bills on time and pull themselves out of the debt trap. One AccountAbility Minnesota customer trapped in the cycle summed it up this way – "it took me a long time to establish good credit and a short time to ruin myself financially.”
Minnesotans want reform. They understand the “debt trap” and rightly view payday loans as usurious and predatory in nature. These lenders claim that payday loans are for unexpected emergency expenses, but the reality is that nearly 70 percent of payday borrowers first used payday loans to cover ordinary, expected expenses. A triple-digit interest payday loan is not a solution for meeting ongoing bills. It only snares the borrower in a debt trap, and the exorbitant cost of borrowing very quickly adds a new stress to the household budget.
Twenty other states and the District of Columbia either effectively ban triple-digit APR payday lending, or have enacted consumer protections. Minnesota should be next.
Brian Rusche is executive director of the Joint Religious Legislative Coalition (jrlc.org) and serves on the steering committee of Minnesotans for Fair Lending.