A bill that would cap payday-loan rates is unlikely to make it to Gov. Tim Walz's desk this spring.

Sen. Gary Dahms, the Republican from Redwood Falls who chairs the Senate Commerce committee, is unlikely to let the reform bill out of committee for a full Senate vote.

"There are plenty of reasons Minnesotans might need access to safe and affordable short-term loans, such as unexpected expenses, bills due before payday or a quick infusion of cash to avoid overdraft fees," Dahms said through a spokeswoman. "Payday lenders provide that cash quickly. I have no interest in destroying that market and forcing Minnesotans into the arms of illegal loan sharks."

Some people say it's the payday lenders who are the sharks.

Those critics support a 36% cap on rates those lenders can impose. At present, interest and fees can combine to create effective rates above 200%.

Even voters in South Dakota, through a referendum, joined nearly 20 states, plus the District of Columbia, to restrict the terms of firms such as Payday America, Unbank and Ace Cash.

"The business model is to make millions off the working poor," said Bishop Bill Tesch of Moorhead, Minn.,-based Northwest Minnesota synod of the Evangelical Lutheran Church in America (ELCA), comprising 223 Lutheran congregations, as he testified on the legislation to the House Commerce Committee.

"A never-ending cycle of debt in which a loan of several hundred dollars becomes ruinous debt of several thousand," he said. "Our church stands with people on the margin. Our Christian faith … has a strong prohibition against this form of usury and exploitation of the vulnerable."

Over nearly a decade, the payday-reform movement has morphed from studies and anecdotal stories into an organized response.

"Two and a half years ago, I found myself a single mother," Melissa Juliette told legislators in 2019. "I fell behind on my bills, including rent. So the late fees started to mount. I took out a [$480] payday loan and was expected to pay back $552 in interest and fees. I thought I could pay it back right away. However, the fees and my mounting bills got out of control. I ended up with four payday loans."

The House Commerce Committee is expected to pass the rate-cap bill of Rep. Jim Davnie, a Minneapolis Democrat, as it did in 2019, when it was also passed by the full, DFL-majority House.

The Minnesota attorney general and commerce commissioner support the reforms.

In 2019, 38,000 Minnesota customers took out 260,000 such loans that totaled nearly $110 million, or about $425 per loan, according to the Minnesota Department of Commerce. The average was seven loans per borrower and the average annual percentage rate was 275%.

Paul Cassidy, a lobbyist for Payday America, the largest such lender in Minnesota, makes the case that, when used properly, such loans are reasonable to customers.

For example, if someone borrows $350 with no collateral on a two-week basis, the payday lender will charge $35 in fees and interest, if that money is repaid within the two weeks. That's less than many overdraft fees at a bank or late payment fees from a credit card issuer.

However, if the loan isn't repaid on time, another $35 charge is imposed, making it $70 overall. On an annualized basis, that adds up to 261% on the $350 that was borrowed.

The problem is many borrowers, despite best intentions, don't pay off within the initial period of the loan. That leads to the proverbial "debt trap" in which borrowers wind up paying only the interest and not the principal, or take new loans to pay off the old one.

Cassidy said the interest-rate cap would put Payday America and others out of business.

There have been new entrants, but they are less visible and convenient than storefront lenders.

Exodus Lending, formed in 2015 by a south Minneapolis Lutheran church, was spun off as a nonprofit business several years ago. It has refinanced hundreds of former payday-loan customers into no-interest loans that are paid off over 12 months. It also plans to seek accreditation as a Community Financial Development Institution to provide its own loans.

"Exodus Lending is nearing our 500th participant, serving people in 36 counties, and we have saved participants over $1.1 million in fees and interest that they would have paid … in the year that they worked with us," Executive Director Sara Nelson-Pallmeyer said. "This is a small-town as well as big-city issue that also disproportionately hits people of color."

Sunrise Banks and Lutheran Social Service work through employers to provide small loans to employees. U.S. Bank, Wells Fargo and other banks and credit unions also have developed small-dollar loan products. They cost up to 24%. They cap rates and limit the number of loans.