On Monday, Gov. Mark Dayton listed payday lending reform as a priority for bringing the 2014 session to a successful end. The payday loan reform bill has already passed the Minnesota House, 73-58, and awaits action on the Senate floor. The governor says the bill contains “practical, sensible limits on the escalating indebtedness caused by multiple high-interest loans.” We at Minnesotans for Fair Lending wholeheartedly agree.
Efforts to reform payday lending began almost three years ago when a group of concerned citizens at Holy Trinity Lutheran Church in the Longfellow neighborhood of Minneapolis were stirred to action. Payday loans were wreaking financial havoc on their financially strapped members and neighbors. They figured people of goodwill should raise their voices to improve our laws and protect consumers.
Payday loans are defined as small dollar loans due on the borrower’s next payday. In Minnesota, an average payday loan is $380 and, for two weeks, carries a finance charge that computes to a 273 percent annual percentage rate (APR). One could overlook this exorbitant interest rate if borrowers took out one loan, climbed out of debt and walked away satisfied. But that is not the reality surrounding this predatory loan product.
Instead, Minnesota Department of Commerce data show that payday loan borrowers take an average of 10 loans per year and are in debt for 20 weeks or more at triple-digit APRs. By the end of 20 weeks, an individual will pay $397.90 in charges for the average $380 loan. Even worse, more than 15 percent of borrowers take out 20 or more loans per year. Borrowers are caught in a debt trap, lured in by the prospect of getting proceeds from their paycheck a little bit early.
Thirty-five organizations joined Holy Trinity’s effort and formed Minnesotans for Fair Lending. Bills were drafted and payday loan customers came to the Legislature to testify in favor of reform and to describe the predatory nature of the payday lending process.
These testifiers echoed what hundreds of customers say in surveys, focus groups and individual interviews — that payday loans don’t solve financial pressures; they make them worse. The exorbitant fees on the loan make the next month’s bills much harder to pay and increase the likelihood of repeat payday borrowing.
One of the testifiers had been in the debt trap for more than a year at triple-digit rates because she had needed money for moving expenses before her monthly disability check was going to arrive. The next month, she couldn’t afford the borrowing cost plus the original cash needed, so she immediately took out another loan, and another. She said she was trapped, losing $35 a month of precious income for 15 consecutive months.
Payday loans were illegal in Minnesota until 1995, when the first payday lending laws were passed. The industry expanded slowly at first, but now it’s a growing problem. According to the Commerce Department, the number of loans in Minnesota doubled in the last five years, ensnaring thousands of customers, and they have drained more than $82 million out of our state’s economy since 1999.
Fifteen states and the District of Columbia have never allowed payday lending or they have come around to effectively ban it. Georgia made payday lending a crime. Five other states have careful restrictions on this type of loan, and Minnesotans for Fair Lending is proposing that Minnesota join this group.
Minnesotans for Fair Lending is seeking two things: reasonable underwriting and a limit to the amount of time in a year lenders can hold borrowers in debt at triple-digit interest rates. A recent poll shows that more than 70 percent of Minnesota voters agree that consumer protections for payday loans in Minnesota need to be strengthened. But things are never simple or easy. The payday loan industry is a big-money, powerful operation. It will be very interesting to see if Holy Trinity’s vision to address an injustice will come to pass. In this last week of the legislative session, we urge the Minnesota Senate to pass the reform.
Brian Rusche is executive director of the Joint Religious Legislative Coalition and a steering committee member of Minnesotans for Fair Lending.