What appeared a likely reform of controversial payday lenders at the Minnesota Legislature fell apart at the close of 2014 session. This year, it didn't even get out of the starting blocks.
This is a setback for a coalition of community and religious groups who demanded concessions and who produced hard-pressed customers who said a several-week loan of $350 or so, led to more loans that critics say puts desperate borrowers in a "debt spiral" of compounding, triple-digit interest charges and fees.
The Minnesota House last year, in DFL hands, passed a bill favored by the Dayton administration and the Minnesota Department of Commerce. But advocates and industry lobbyists could not find common ground. And the Senate passed.
This year, with the sides not even talking and the House now in Republican hands, no hearings were held.
"I'm still committed to this," said Commerce Commissioner Mike Rothman. "This goes to my goals for building [family] financial capability. The dialogue [between the industry and consumer groups] got difficult when it came to the interest rate and the number of loans. Families do need affordable credit. It's troublesome when they are caught in debt traps."
The payday lenders, led by Payday America, the 15-store company owned by the Rixmann family that also owns Pawn America, have resisted changes that would limit the number of loans to one borrower and cap interest rates at 30 percent.
Paul Cassidy, a lobbyist for Payday America, and Chuck Armstrong, a Payday America executive, said the proposed reform bill would kill the Minnesota industry. The industry's concession was to propose a common-reporting system so that consumers who borrow from several lenders would be refused additional credit after several loans are documented.
"We don't want to keep people in a debt spiral," Armstrong said, adding that the demise of payday lenders would lead customers to unregulated loan sharks and Internet operators. "Oftentimes it takes more than one loan cycle for a family to get out of debt. Our opponents are manufacturing hysteria."
Payday lenders determine that borrowers have income, but there is no limit on the number of rollover loans that effectively compound interest rates. Commerce says the average customer has 10 loans, with an average finance charge of $26.50 per $303 average loan, plus charges for multiple loans that lead to annual interest expense of 225 percent or more.
In a typical payday loan, a consumer must provide either a personal check to the lender or authorize access to his bank account for the collection of the principle and fees. Critics say that allows payday lenders to drain unwitting borrowers.
"The business model relies on predatory rates and loan churning," said Brian Rusche, executive director of the Joint Religious Legislative Coalition and a leader of the 35-organization Minnesotans for Fair Lending. "The state of North Carolina banned the industry. Congress imposed rate caps [on military personnel] several years ago because the payday lenders were taking advantage of junior troops around bases.
"Congregants in our church basements say if we can protect military families, why not everybody? Payday loans don't solve financial problems. They make things worse. We should at least limit the number of loans [to four or five] and reduce the danger of getting people into the never-ending debt trap."
In 2013, the last year for which complete statistics are available, more than three dozen Minnesota payday lenders made 89,465 loans to 9,168 Minnesota consumers, about nine per person. They are mostly working-class folks who don't qualify for lower-cost bank credit. These people don't have much clout at the Legislature.
Legislators, including Republicans and Democrats, would rather ordain something that has emerged from compromise. And that's not in sight between the payday-lending adversaries.
Meanwhile, last month the Consumer Financial Protection Bureau (CFPB) revealed much-anticipated plans to help corral the $50 billion payday industry. The proposal by the fledgling agency faces months of review.
In its plan, the CFPB suggests that payday lenders from the outset should determine whether borrowers have the ability to repay without defaulting or re-borrowing. That would lessen profitability because the money is really made when borrowers take out new loans to pay back the initial loans and their fees plus more to stay afloat. The CFPB would limit the number of loans to three, before a 60-day cooling-off period. And there are other elements that both sides in the debate have criticized.
Any new federal limitations are not expected before 2016.
Meanwhile the marketplace is starting to surface a few fledgling alternative products.
Exodus Lending, started by Holy Trinity Lutheran Church of Minneapolis and other partners, was launched this month as a nonprofit refinance program for payday borrowers. But the nonprofit has yet to graduate its first client.
The credit union industry is experimenting with some small-dollar loan programs.
And St. Paul-based Sunrise Banks, after a couple of years of testing, in January launched a small-loan program through participating employers. The Sunrise TrueConnect product, offered through three employers so far, is a loan against future salary in amounts of up to $3,000 over one year, depending upon the participant's income. The maximum interest rate is 25 percent and the loan is retired through pay deductions.