Payday loan law helps state borrowers

The Minnesota Legislature should regulate the payday lending industry.

by Ronald Dixon

Rep. Joe Atkins, DFL-Inver Grove Heights, introduced a bill last week that would regulate the payday lending industry in Minnesota. As this legislation makes its way through committee, we should advocate for its passage into law to protect the state’s struggling

Historically, people trying to pay bills between paychecks are the primary targets of payday loans. Without looking much at a borrower’s finances, payday loan companies design the loans to be temporary, with high interest rates — some with 270, 300 or 400 percent annual rates — and quick turnaround times.

For some people, this service is fantastic. If they know that they will have the means to quickly pay off the loan, then they should be fine. Issues arise, however, when consumers are uncertain about their future paychecks and bills. If someone gets one of these loans and doesn’t plan out a quick payment schedule, delayed payments and high rates can cripple their finances.

After a short period of time, the interest rates of the payday loans begin to turn into more debt. Often, this interest rate is far higher than traditional loans from a federal or community bank. For people already struggling with paying bills, it’s not hard to see how these loans can be both attractive and extremely risky.

There are also problems with the way payday loan companies treat their borrowers. Debt collectors that work with these loan agencies have a reputation of harassing consumers trying to get out from under debt.

This problem has grown in Minnesota. While many states have moved forward with regulations that protect misinformed consumers, other states, such as Minnesota, have done very little to regulate the payday loan industry. This likely explains why the distribution of these loans has doubled during the past five years in the state, and with it, the pain of thousands of Minnesotans.

Thankfully, Atkins has provided a solution to the payday loan problem. If passed, the legislation would protect consumers through a ban on giving potential borrowers loans that an agency knows they will be unable to pay back. Another aspect of the bill would bar these companies from offering loans to individuals more than four times per year. Finally, it would enhance scrutiny on the debt collecting methods of these lending services.

Of course, some were quick to critique these proposals. Some lawmakers argued that these laws would drive the payday lending industry out of the state, and it would leave thousands of Minnesotans without any other form of emergency financial options.

Regulations that protect consumers do not inflict unsustainable costs for businesses, and critics of this bill have failed to provide examples of when laws prevented private enterprise from functioning properly. Moreover, there are several options available to consumers apart from payday lending. Small community banks, for example, are typically receptive to the needs of working people who need temporary assistance.

Gov. Mark Dayton recently called this legislative session the “unsession” because he wants lawmakers to make the government better for Minnesotans. To update the state’s lack of consumer protections, the Legislature should pass this payday loan legislation to aid borrowers, as other states have already done.