Predatory business model supports cycle of repeat borrowing with fees, for average APR of 273%
ST. PAUL, MINN. – (March 18, 2014) — Between 1999 and 2012, payday lenders drained over $82 million in fees from financially-stressed Minnesotans, primarily from suburban and Greater Minnesota communities. That’s the message from Minnesotans for Fair Lending (MFL), the 34 endorsing organizations representing seniors, social service providers, labor, faith leaders and credit unions, advocating reform of the state’s payday lending law.
“In 2012 alone, 84 storefront locations extracted over $11.4 million statewide,” said Brian Rusche, executive director of Joint Religious Legislative Coalition (JRLC) at today’s press conference. “The payday debt cycle is responsible for the majority of these fees. Payday loan fees are dollars that Minnesotans cannot spend elsewhere.”
A new report from Minnesotans for Fair Lending shows estimates by city of how much has been drained by payday lenders between 1999, the first year for which data is available, and 2012, the most recent data from the Minnesota Department of Commerce. Examples of city totals are Bloomington at $5,923,786 and Rochester at $5,212,385.
“Payday lenders not only hurt distressed households; they harm local economies,” noted Rusche. “This is because extremely high loan costs hinder economic activity.”
Rusche described payday loans as small-dollar, high-interest loans requiring full payback on the borrower’s next payday. They carry triple-digit annual interest rates, are due in full on a borrower’s next payday, require direct access by the payday lender to a borrower’s bank account, and are made with little or no regard for a borrower’s ability to repay the loan.
According to Minnesota Department of Commerce data, the typical payday loan borrower takes out ten loans per year. At the end of 20 weeks, an individual will pay $397.90 in charges for a typical $380 payday loan making the annual interest rate 273%. In 2012, more than one in five borrowers in Minnesota was stuck in over 15 payday loan transactions.
The MFL report says that nationally three-quarters of payday loan fees are due to churning borrowers payday after payday.
“Payday lenders claim that payday loans are for unexpected emergency expenses, but the reality is that nearly 70% of payday borrowers first used payday loans to cover ordinary, expected expenses,” explained Rusche. “As such, a triple-digit interest payday loan is not a solution for meeting ongoing bills. It snares the borrower in a long-term debt trap.
Data show that the payday loan debt trap leads to financial consequences such as delinquency on other bills, increased likelihood of overdraft fees, and even bankruptcy.”
Legislation has been introduced to reform the current payday lending law. HF 2293 (Atkins) passed out of the House Commerce committee on February 26. A Senate hearing is expected before March 28 for SF 2368 (Hayden).
The reforms include:
- Capping the number of payday loans per borrower to four a year.
- Requiring payday lenders to use basic underwriting standards prior to making a loan, ensuring a borrower’s ability to repay.
- Closing a legal loophole and eliminating the ability of dominant payday lenders to evade the current law and charge more than it allows.
“Limiting the number of loans prevents the abusive debt cycle while still allowing payday loans to be available,” said Rusche.