Minnesota caps rates on payday loans — with a wrinkle

Eva Marie Uzcategui/Bloomberg

Payday lenders in Minnesota will be prohibited from charging annual interest rates above 50% under a measure the state's governor has signed into law. 

The law is the latest victory for consumer advocates, who want to implement 36% rate caps across the country, a step they say is needed to prevent exorbitant charges for low-income consumers.

Minnesota's law is not a flat out 36% rate cap, but by putting strict limits on payday loans with rates between 36% and 50%, it could drastically reduce the product's availability.

The law will "disrupt the predatory business model" of payday lenders so that they stop "creating long-term debt traps for consumers," said Yasmin Farahi, deputy director of state policy at the Center for Responsible Lending.

Payday borrowers in the state pay an average annual percentage rate of 220%, and they often roll over their debt because they struggle to repay the initial loan, the group said.

Payday lenders had pushed back against the Minnesota legislation, warning that a strict rate cap could push them out of business and limit the options of consumers who need emergency cash.

INFiN, a trade group that represents payday lenders, has said that 36% rate caps leave cash-strapped consumers to "face the hefty costs and consequences associated with unmet bills, late payments or illegal loans," as payday lenders close up shop.

Farahi countered that consumers will be able to turn to lower-cost options, including the small-dollar loan products that major banks are rolling out and an offering from Exodus Lending, a Minnesota nonprofit that helps consumers refinance payday loans.

While payday lenders in Minnesota will still be able to charge rates between 36% and 50%, the new law will require them to conduct an analysis of consumers' ability to repay their loans. 

That analysis will take into account borrowers' income, their living expenses and their other outstanding debts.

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The payday loan industry has fought such ability-to-repay requirements at the federal level, and their efforts have left a Consumer Financial Protection Bureau rule aimed at payday lenders in legal limbo for years. The industry has also opposed efforts to implement a national 36% rate cap — a measure proposed by some Democrats that has consistently failed to garner enough support from lawmakers.

Farahi said that while a 36% rate cap would be ideal, Minnesota's ability-to-repay standard for payday loans will limit consumer harm. "We feel really optimistic about this," Farahi said, expressing confidence in state regulators' ability to take action if any lender breaks the rules.

The measure, part of a broader package that the state's Democratic governor, Tim Walz, signed into law, will take effect on Jan. 1.

Twenty states, along with the District of Columbia, now have either 36% rate caps for payday loans or strict measures that protect consumers from repeated rollovers of their debt, according to the Center for Responsible Lending.