Businesses that offer on-the-spot cash loans at higher interest rates than your typical bank are in the cross hairs of a coalition geared toward limiting the number of transactions they can make in a year.
Proponents of legislation to rein in payday lending say the industry amounts to modern-day loan sharking, leaving customers in an endless cycle of debt. But payday lenders say their detractors are merely creating opportunities for the true predators: unregulated online lenders.
According to the Consumer Finance Protection Bureau, payday loans typically have three traits: They’re for small amounts, they come due on your next payday, and borrowers must give lenders access to their checking account or write a check for the balance in full that the lender can deposit on the loan’s due date.
Minnesotans took out 381,000 payday loans in 2012 at 84 outlets across the state, like Payday America, Ace Cash Express and Unloan — double the number taken out in 2007.
A Minnesota House bill proposes limiting payday lenders to four loans a year per customer, while the Senate’s bill caps out at eight, with a 45-day waiting period between loans. Both will likely be debated on the floor, but whether a compromise is reached remains to be seen.
Minnesota’s effort, led by the Joint Religious Legislative Coalition, is following a nationwide trend among 22 states that either banned or heavily regulated payday lending.
“What bothers us is not that the product exists, but that it traps people over time in these exorbitant rates,” said JRLC Executive Director Brian Rusche.
The efforts to rein in payday lenders are well-intentioned but misguided, said Chuck Armstrong, chief legislative officer for Payday America and Pawn America.
“I’ve referred to it as manufactured hysteria,” Armstrong said. “There are no complaints about our product. It’s interest groups, like the folks pushing this legislation. Ask our customers. There are no complaints with the attorney general’s office or Department of Commerce that we are aware of.”
On the contrary, he said, more than 10,000 customers signed petitions in support of payday lending. Armstrong said such customers aren’t victims. Instead, he said, they’re articulate and financially savvy people who believe paying a higher interest rate for a quick injection of cash is better than paying an overdraft fee from the bank or a late fee on a bill.
Regardless of stance, the numbers are consistent. Rusche estimates that the average Minnesotan who does payday loans takes out 10 a year, of about $380 each. The fees and financing alone for those loans would cost customers $397.70. Armstrong said payday lenders will charge $35 to $40 in interest for a $350 loan, something he said is reasonable.
Rusche said payday lending didn’t exist in Minnesota until 1995, when the industry made the case that regular banks were not making small loans to people with weak or poor credit history who needed cash in emergencies. They asked to be allowed to offer credit, but at high interest rates, needed because of the higher likelihood of default from high-risk customers.
“The typical borrower is in there not because of emergencies, but because they’re in the trap,” Rusche said. “Most loans in there are the churning of repeat lending.”
Armstrong said lenders like Payday America offer “off-ramp” extended payment plans that help customers in bad financial straits break the cycle by converting to an extended installment loan. He points to Internet lenders like Western Sky Financial, sued last year by Minnesota Attorney General Lori Swanson, that charged interest rates of up to 782 percent. The legislative challenge to payday lending is a perennial one, he said, and the company intends to stand up to such laws not only because they could harm the business, but customers as well.
Rusche said the coalition intends to work with the payday lending industry to come up with a joint solution.
“We want to stick with our principles,” Rusche said. “We are convinced what’s going on is predatory and not acceptable.”