Debt and debtors have been a concern of the faith community since the days of Moses. That manifested itself anew this week at the State Capitol, as the Joint Religious Legislative Coalition (JRLC) and Holy Trinity Lutheran Church of Minneapolis called on lawmakers to crack down on payday lending.
Payday loans are short-term, small-amount, high-interest loans that some banks have offered since the Great Depression but that began to proliferate in storefront operations about 20 years ago and online more recently. Many, though not all, such loans require payment in full when the borrower’s next paycheck arrives, often via the borrower providing the lender with a postdated check. They are targeted at low-income consumers who have little or no access to conventional sources of credit. Twelve million Americans used payday loans in 2012, according to the Pew Charitable Trust, including 39,000 in Minnesota.
The reason such loans have come under fire from religious groups is revealed by some additional numbers: Those 39,000 Minnesotans took out 371,000 separate loans last year, for an average of nearly 10 per borrower. Those repeat borrowers carried loan balances at an annualized interest rate that routinely exceeds 400 percent, according to a new JRLC report. Clearly, this high-cost borrowing has become routine for some people who can ill-afford its high costs.
“People get trapped,” charged Brian Rusche of JRLC. He painted a grim picture of borrowers so financially desperate and/or poorly informed that they take on debt burdens that exceed their ability to promptly repay. They frequently refinance their original loans, each time racking up additional fees that, industrywide, average $17 for every $100 extended. Repeat borrowers can wind up spending substantially more on interest than on the original principal, Rusche said.
That’s not a fair or complete picture, Minnesota industry sources counter. Payday lending services satisfy a genuine need for emergency financial assistance within a population that has few other alternatives in the financial marketplace. Further, they said, reputable lenders strive to help borrowers make informed decisions.
But they acknowledge that their industry includes some bad actors who are escaping regulation and overcharging borrowers. They said they would welcome a leveling of the regulatory playing field. That plea should be heeded by state and federal officials.
Payday lending has doubled in size in Minnesota in the last five years. That explosive growth alone warrants scrutiny from the Legislature. Payday lending is already on the regulatory radar of the new federal Consumer Financial Protection Bureau; the Office of the Comptroller of the Currency, which regulates U.S.-chartered banks, and the state Commerce Department. Commerce Commissioner Michael Rothman says that on his watch, his department has stepped up its efforts to police payday lenders.
Government’s goal should not be to eliminate payday lending. Not even the JRLC critics would go that far. Rather, JRLC urges that limits on fees and other regulations that now apply to banks be extended to storefront and online payday lenders as well. The difference can be seen in Wells Fargo’s Direct Deposit Advance program. It charges a fee of $7.50 per $100 extended, $10 below the industry average, a spokesperson said.
Minnesota should also consider following the lead of Colorado, whose 2010 payday lending statute won praise from the Pew Charitable Trust last month. The law requires lenders to offer payday borrowers a six-month installment repayment plan in addition to the standard lump-sum repayment.
Pew recommended capping the size of installments at 5 percent of gross periodic income. JRLC also endorsed converting recurring payday loans to installment loans, something the Wells Fargo program does after a customer uses the service for three consecutive statement cycles.
While those regulations are worth pursuing, a key defense against predatory payday lenders is a financially literate public. That’s why we applaud the involvement of churches like Holy Trinity and other community organizations in efforts to spread the word about the true cost of short-term borrowing, and to help borrowers pursue less costly options. The state Commerce Department’s recent emphasis on educating young people about financial matters is also welcome.
Such efforts have become more important as the ranks of the near-poor have grown in recent years to include people unaccustomed to coping with scarce resources. Before there were storefronts and websites luring those people with lending come-ons, there were employers, faith communities, charities, unions and other neighborhood sources to which households in financial trouble could turn. In an economy that has not been kind to low-wage workers, those local resources are still needed, perhaps more than ever.