Out-of-state lenders who provide short-term consumer loans against workers' next paychecks will be subject to Minnesota law and licensing requirements, the Minnesota Department of Commerce ruled Friday.

Kevin Murphy, a deputy commissioner in charge of state-licensed financial institutions, said the volume of so-called payday loans has "exploded" on the Internet and the state has started to get consumer complaints about fees and unresponsiveness of out-of-state lenders to their questions.

"We've had a small number of complaints from Minnesota consumers about Internet-based payday lenders," Murphy said. "We've had very few complaints about payday lenders who have a physical presence here."

Murphy said a "payday loan may be considered a bad deal, but it is a straightforward bad deal. It's pretty easy to understand. We have a pretty conservative fee schedule and we want the Internet lenders to toe the line."

Murphy said the typical payday loan in Minnesota is $350 with a $25 fee and a term of a few days to a few weeks.

"We think there have been higher-than-legal fees charged" by Internet lenders, he said.

The department announced that all payday lenders will have to be licensed in Minnesota and subscribe to state regulations by Dec. 1, or cease doing business in the state.

The Commerce Department was prodded by the Minnesota attorney general. "The 'AG' sues people all over the country all the time," said Ron Elwood, an attorney with Legal Services Advocacy Project in St. Paul. "Anybody who does business in Minnesota has to adhere to Minnesota laws.

"All [state regulators] need to do is take aggressive enforcement action against one or two [violators],'' Elwood said. "Word gets around quickly and [some] will just go elsewhere."

Ohio, New Hampshire and several others states have instituted interest rates on payday loans that top out at about 36 percent, a figure Elwood said effectively eliminates payday lending. Minnesota's cap is now 390 percent under the small-consumer loan law that covers payday lenders. That's the interest rate a payday borrower can be charged over the course of a year, known as the annual percentage rate or APR.

Legislation proposed last session would have forced all short-term lenders under the small-consumer loan law and capped annual interest rates at 36 percent.

The Legislature didn't pass that bill designed to rein in a $60 million growth business in Minnesota.

Payday lenders argued that the bill would take the profit out of their loans to high-risk consumers.

Payday lenders write loans of several hundred dollars for short periods -- usually two to four weeks -- to people who find themselves short until next payday. Customers leave the lender a check for the amount of money they are borrowing -- plus fees and interest -- postdated to the payoff date. They either return and repay the full amount by then, or the lender cashes the check.

The industry says it provides loans to people -- often for emergencies such as illness or car repairs -- whose credit history disqualifies them at traditional lenders. They also say that high annual interest rates matter little since the loans usually run for a few days or weeks.

Neal St. Anthony • 612-673-7144 • nstanthony@startribune.com

H.J. Cummins • 612-673-4671 • hcummins@startribune.com.