State Lawmakers Again Plan Payday Loan Reform Push

Minnesota lawmakers plan to introduce legislation next year to curb payday lending after a previous proposal failed that would have limited the number of loans consumers can take out to four.

A specific proposal has yet to be designed but other states’ reforms are expected to provide guidance as lawmakers seek to strike a balance that protects consumers and avoids putting lenders out of business. 

Payday lenders had opposed earlier efforts to cap interest rates, arguing that rate and loan caps would wipe them out entirely. Payday America, the largest payday lender in Minnesota, spent more than $300,000 to kill the first bill. 

Nick Bourke, director of Pew Charitable Trusts' research on small dollar loans, said other states have implemented three types of reforms: lower interest rates, a limit on the number of loans and offering consumers a longer repayment period with more affordable payments. He believes the least effective of the three is the limit on the number of loans. 

Rep. Joe Atkins, DFL-South St. Paul, sponsored the 2014 payday lending reform bill. He said reform measures don’t seek to unjustly harm payday lenders but that “reasonable” interest rates need to be established. He believes consumers should explore other options - such as figuring out a payment plan with a creditor, requesting an advance from an employer or turning to nonprofits who offer emergency aid - before turning to payday loans. 

Tracy Fisch­man, executive director of Prepare + Prosper, a St. Paul nonprofit, said that while payday lenders may fill a void they ultimately hurt consumers. 

The Minnesota Commerce Department shows the average annual interest rate on these types of loans exceeded 260% last year. The average customer takes out nearly 10 such loans a year.

Fischman said her group encourages clients to use tax refunds, which can be huge windfalls for many low-income residents, to build savings. The goal is to reduce reliance on alternative lending, she added.  Local nonprofits, she added, have been working on an initiative with banking partners to develop credit-building products for low-income residents. It’s expected to launch next year.Fischman also supports rules being drafted by the Consumer Financial Protection Bureau. The CFPB’s plan, submitted in March, restricts lenders from collecting funds from customers in ways that often result in excessive fees. The CFPB wants to give lenders two options: either ensure borrowers have the ability to repay before issuing credit or comply with limitations after the loan is issued such as restricting how often it can be rolled over or reissued within a certain time frame.

Sen. Branden Petersen, R-Andover, doesn’t oppose reform efforts in Minnesota but said any solution should be carefully weighed. His biggest concern is the possibility that consumers will be left with no alternative for quick, emergency cash.

According to a survey by Pew Charitable Trusts, payday lending reform has earned widespread support from Americans. The organization’s research, conducted in May, reveals 3 in 4 Americans believe payday loans should be more regulated and only 1 in 10 view payday lenders in a positive light.

The Pew survey reveals 78% of consumers support the idea of requiring a lender to check a borrower's ability to repay a loan before issuing funds. Approximately 75% believe consumers should be allowed to make payments over the course of several months, rather than just two weeks.

An estimated 12 million Americans use payday loans each year with the average loan roughly $375, according to the Pew survey. Because they are usually not paid back in time and must be made repeatedly, the average payday loan incurs $520 in fees.

Nearly 8 in 10 survey respondents would like banks and credit unions to be allowed to offer small-dollar loans at rates lower than payday lenders.