Urge Legislators to End Usury Loophole & Protect Minnesotans with a 36% Interest Rate Cap on Payday Loans
The Problem:
Payday loans are small-dollar, high-interest loans requiring full payback on the borrower’s next payday. They typically carry triple-digit annual interest rates, are due in full on a borrower’s next payday, require direct access to a borrower’s bank account, and are made with little or no regard for a borrower’s ability to repay the loan. Because of these features, borrowers often cannot both repay the payday loan and meet their other obligations without having to quickly re-borrow.
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.[1] As such, a triple-digit interest payday loan is not a solution for meeting ongoing bills. In Minnesota, the typical payday loan borrower takes out ten loans per year. By the end of twenty weeks, an individual will pay $397.90 in charges for a typical $380 payday loan. Payday loans don’t solve financial pressures; they make it worse.
Repeat lending is based on a succession of new loans, but it does not generate new resources for the borrower. Each loan is issued separately, with the balance due on the borrower’s next payday. Borrowers often need the next loan because paying off the previous loan made it harder to pay the month’s bills. In most cases, after 10 loans, the fees paid by the borrower will exceed the original loan amount. By design, payday loans trap consumers in a downward spiral of debt.
Minnesota law allows a typical $380, two-week payday loan to cost as much as $40, which translates to a 273% APR. In addition to high costs, state law currently provides no protections against the debt trap, or any standards to ensure that borrowers can repay the loan without re-borrowing. A typical $380, two-week payday loan carries an APR of 273%.[2] This is more than what is permitted under the Payday Lending Law (which was designed to regulate all payday lenders) because three of the largest payday lenders in the state operate under a loophole in our law. We believe the loophole should be closed and the same rules be applied to all payday lenders in the state. The APR on smaller loan amounts are even higher. Loophole lenders can charge 600-700% APR on a $100 loan.
[1] 1 Pew Charitable Trusts. Who Borrows, Where They Borrow, and Why. 2012.
[2] 4 Payday America is authorized under the loophole to charge a $30 loan fee and a $50 annual fee. Depending on the size of the loan, Payday America charges either a $25 or $30 fee and some portion of the annual fee per loan.
Church Teaching:
Pope Francis has denounced usury as contrary to human dignity and a “dramatic social ill” because it takes advantage of another person in desperate financial situations.
Usury, or the practice of lending money at exploitatively high interest rates, has become increasingly widespread over the past decade as families struggle with economic insecurity. And though most states have laws regulating usury and capping excessive interest rates, these laws do not necessarily address all exploitive and abusive lending practices.
If laws and regulations fail to address all abusive lending practices that exist, then Catholics must oppose usurious practices that exploit people’s financial problems for profit.
As Catholics, we need to ask ourselves if that type of business practice is harmful to our community, and if so, then what can we do to change the laws regulating payday lending. St. Thomas Aquinas wrote that the purpose of a law is to lead citizens towards virtue and goodness. The law, he reasoned, is a moral teacher that plays a central role in how we order our lives in our businesses, in our relationships, and in our communities.
Currently, the laws surrounding payday lending are not encouraging healthy business practices. The mere presence of a willing lender and willing consumer does not make a practice right or promote human flourishing.
Your Action:
Urge legislators to support the payday lending reform provision in the House Omnibus Commerce bill (H.F. 1031, Article 4, Sections 2-5 and 9-10) that would place a 36% cap on the total interest and fees that can be charged in connection with a payday loan.
The 36% rate cap is derived from the Military Lending Act. At the request of the Department of Defense, Congress enacted the Military Lending Act in 2006, limiting payday loan interest rates to 36% APR for active duty military personnel and their families.
The 36% rate has been reaffirmed repeatedly at the state and federal level in recent years. Congress and three federal agencies have endorsed the rate. More and more states and their voters are capping small loans at 36% or less – currently 15 states and the District of Columbia. The 36% rate for small loans results in payments that consumers have a decent chance of being able to pay. A 36% rate also gives lenders an incentive to offer longer term loans with a more affordable structure and to avoid making loans that borrowers cannot afford to repay.
There is no reason why all Minnesotans should not have the same protection against excessive interest rates on payday loans that are provided to servicemembers. This reform to lending practices in our state will create a set of laws that encourage businesses to participate in healthy lending practices and will ensure that borrowers can take out loans without getting stuck in too deep a debt trap.
Urge Legislators to End Usury Loophole & Protect Minnesotans with a 36% Interest Rate Cap on Payday Loans
The Problem:
Payday loans are small-dollar, high-interest loans requiring full payback on the borrower’s next payday. They typically carry triple-digit annual interest rates, are due in full on a borrower’s next payday, require direct access to a borrower’s bank account, and are made with little or no regard for a borrower’s ability to repay the loan. Because of these features, borrowers often cannot both repay the payday loan and meet their other obligations without having to quickly re-borrow.
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.[1] As such, a triple-digit interest payday loan is not a solution for meeting ongoing bills. In Minnesota, the typical payday loan borrower takes out ten loans per year. By the end of twenty weeks, an individual will pay $397.90 in charges for a typical $380 payday loan. Payday loans don’t solve financial pressures; they make it worse.
Repeat lending is based on a succession of new loans, but it does not generate new resources for the borrower. Each loan is issued separately, with the balance due on the borrower’s next payday. Borrowers often need the next loan because paying off the previous loan made it harder to pay the month’s bills. In most cases, after 10 loans, the fees paid by the borrower will exceed the original loan amount. By design, payday loans trap consumers in a downward spiral of debt.
Minnesota law allows a typical $380, two-week payday loan to cost as much as $40, which translates to a 273% APR. In addition to high costs, state law currently provides no protections against the debt trap, or any standards to ensure that borrowers can repay the loan without re-borrowing. A typical $380, two-week payday loan carries an APR of 273%.[2] This is more than what is permitted under the Payday Lending Law (which was designed to regulate all payday lenders) because three of the largest payday lenders in the state operate under a loophole in our law. We believe the loophole should be closed and the same rules be applied to all payday lenders in the state. The APR on smaller loan amounts are even higher. Loophole lenders can charge 600-700% APR on a $100 loan.
[1] 1 Pew Charitable Trusts. Who Borrows, Where They Borrow, and Why. 2012.
[2] 4 Payday America is authorized under the loophole to charge a $30 loan fee and a $50 annual fee. Depending on the size of the loan, Payday America charges either a $25 or $30 fee and some portion of the annual fee per loan.
Church Teaching:
Pope Francis has denounced usury as contrary to human dignity and a “dramatic social ill” because it takes advantage of another person in desperate financial situations.
Usury, or the practice of lending money at exploitatively high interest rates, has become increasingly widespread over the past decade as families struggle with economic insecurity. And though most states have laws regulating usury and capping excessive interest rates, these laws do not necessarily address all exploitive and abusive lending practices.
If laws and regulations fail to address all abusive lending practices that exist, then Catholics must oppose usurious practices that exploit people’s financial problems for profit.
As Catholics, we need to ask ourselves if that type of business practice is harmful to our community, and if so, then what can we do to change the laws regulating payday lending. St. Thomas Aquinas wrote that the purpose of a law is to lead citizens towards virtue and goodness. The law, he reasoned, is a moral teacher that plays a central role in how we order our lives in our businesses, in our relationships, and in our communities.
Currently, the laws surrounding payday lending are not encouraging healthy business practices. The mere presence of a willing lender and willing consumer does not make a practice right or promote human flourishing.
Your Action:
Urge legislators to support the payday lending reform provision in the House Omnibus Commerce bill (H.F. 1031, Article 4, Sections 2-5 and 9-10) that would place a 36% cap on the total interest and fees that can be charged in connection with a payday loan.
The 36% rate cap is derived from the Military Lending Act. At the request of the Department of Defense, Congress enacted the Military Lending Act in 2006, limiting payday loan interest rates to 36% APR for active duty military personnel and their families.
The 36% rate has been reaffirmed repeatedly at the state and federal level in recent years. Congress and three federal agencies have endorsed the rate. More and more states and their voters are capping small loans at 36% or less – currently 15 states and the District of Columbia. The 36% rate for small loans results in payments that consumers have a decent chance of being able to pay. A 36% rate also gives lenders an incentive to offer longer term loans with a more affordable structure and to avoid making loans that borrowers cannot afford to repay.
There is no reason why all Minnesotans should not have the same protection against excessive interest rates on payday loans that are provided to servicemembers. This reform to lending practices in our state will create a set of laws that encourage businesses to participate in healthy lending practices and will ensure that borrowers can take out loans without getting stuck in too deep a debt trap.