Repeat borrowing, regulatory weakness and loopholes are helping fuel an exploding number of payday loans in Minnesota, report says.
An interfaith group is calling for a broad new crackdown on payday lending in Minnesota, saying existing restrictions on the growing industry aren’t tough enough.
The Joint Religious Legislative Coalition released a report at a Capitol news conference Tuesday showing that the number of payday loans in Minnesota has more than doubled over five years to 371,000 in 2012. The typical payday borrower in Minnesota took out an average of 10 loans a year, frequently spending more on interest than what they first borrowed.
“It seems like people in vulnerable situations are being taken advantage of,” said the Rev. Jay Carlson of Holy Trinity Lutheran Church in south Minneapolis. “We as a church need to be involved in this issue.”
The coalition represents the Minnesota Catholic Conference, Minnesota Council of Churches, Islamic Center of Minnesota and the Jewish Community Relations Council of Minnesota and the Dakotas. The report draws on research by the St. Paul-based Legal Services Advocacy Project and Pew Charitable Trusts.
Among the recommendations: Limit the number of high-cost, short-term loans a person can get in a year, and close a loophole that lets lenders register as an Industrial Loan and Thrift, avoiding existing payday rules.
It also recommends payday lenders verify a borrower’s ability to repay, and ask about whether they or family are military members and subject to a 36 percent interest rate cap.
The new push comes amid mounting pressure nationwide on the payday industry from state and federal bank regulators, as well as the new Consumer Financial Protection Bureau.
But industry groups have long argued that the quick-cash lenders fill a need in the market, and that heavy-handed regulation could have adverse effects.
“These certain types of restrictions drive consumers to financially risky products such as offshore online lenders who operate outside of the law,” said Amy Cantu, spokeswoman for the Community Financial Services Association of America, a trade group representing storefront (but not online) payday lenders.
The number of payday loans in Minnesota is likely far higher than the report estimates since it doesn’t count loans made by online lenders not registered in Minnesota. It also doesn’t count payday loan-like deposit advances that some banks offer, a practice federal bank regulators are likely to curb.
Most people borrow the money not as an emergency fix for a one-time calamity, but to pay for essentials such as food, gas and rent, said Brian Rusche, the coalition’s executive director. “This is not a one-time deal. People get trapped,” Rusche said.
Anna Brelje, 33, recalled being trapped in a circle of payday-like cash advance loans from Wells Fargo about 10 years ago. She was working as a political organizer but couldn’t make ends meet because of medical bills.
One day she used a cash advance feature online with her Wells Fargo account. The cost only added to her debts, she said, and she used the loans for two years.
Brelje said a better job and financial counseling helped her dig out. She said she felt angry when a counselor told her she’d more paid $2,000 in fees. “I had no idea I was paying an APR of 700 percent,” Brelje said.
Such repeat borrowing is the crux of the problem, said Ron Elwood, supervising attorney at the St. Paul-based Legal Services Advocacy Project and a leading voice on payday regulation.
A spokeswoman for San Francisco-based Wells Fargo said the bank offers its Direct Deposit Advance online to customers with regular direct deposits. The bank has practices to help ensure customers don’t use it as a long-term solution.
“We are very clear, upfront and transparent with our customers that Direct Deposit Advance is an expensive form of credit and that it is not intended to solve long-term financial needs,” Peggy Gunn said.
State authorities have been aggressively pursuing unlicensed payday lenders operating in Minnesota via the Internet. Yet Minnesota is a middle-of-the-road state in terms of overall payday regulation.
Payday lenders can lend up to $350 in Minnesota, for instance, and the state caps the interest rates at varying levels by loan amount. A two-week loan for $200 at the maximum 7 percent interest rate plus a $5 fee equals an APR of about 247 percent.
About 25 lenders in the state operate under those rules. But a handful don’t. The report said some lenders qualify as an Industrial Loan and Thrift, allowing them to charge higher rates.
Among those lenders: Ace Minnesota Corp., part of the Texas-based Ace Cash Express Inc. franchise; Unloan Corp. based in Minneapolis; and Payday America Inc. in Burnsville.
Chuck Armstrong, chief legislative officer for Payday America, said the company is not avoiding payday rules. The company’s main product is not a traditional payday loan, he said, but a one-year line of credit.
Jennifer Bjorhus • 612-673-4683