Patrick Rosenstiel’s recent Community Voices essay stated that interest-rate cap policies would create a less diverse, less inclusive economy. He indicates that “consumers who turn to small-dollar lenders for high-interest loans are making well-informed choices for their personal financial well-being.” I couldn’t disagree more, based on my years of working with Minnesotans trapped in predatory and usurious payday loans. As the director of Exodus Lending, a nonprofit that refinances payday and predatory installment loans for Minnesotans caught in what’s known as the payday loan debt trap, my perspective is, from experience, quite different from that of Rosenstiel.
In some cases, consumers’ choices are well-informed, although in many cases, people are desperate and unaware that they are likely to be trapped in a cycle of recurring debt and subsequent loans, which is the intent of the lender. The average Minnesotan payday borrower takes out seven loans before being able to pay off the amount that was originally borrowed.
Small loans, huge interest
Since 2015 we at Exodus Lending have worked with 360 individuals who, when they came to us, had been paying, on average, 307% annual interest on their “small dollar” loans. This means that the loan may not have been large, but the amount that these borrowers had been paying their lenders, such as Payday America, Ace Cash Express or Unloan, certainly was. Because of what we have seen and what our program participants have experienced, we heartily support a 36% interest rate cap on such loans.
There are times when almost all of us can use some extra money – perhaps the car’s battery dies; a child’s growth spurt means a need for a new pair of shoes; an unexpected illness or death in the family means unwelcome expenses; etc. For many of us, there is a safety net of friends, family or a savings account that can help us ride the storm, while we can still afford our regular expenses. For others, this is a hardship. The answer, however, should not be a usurious loan at rates of 70%, 100% or upwards of 400% APR! Alternatives should be available for persons to access. While it may be that companies can make ridiculous amounts of money taking advantage of people in their vulnerable financial state, this does not mean it is a good idea.
Just ask the people in the community themselves! According to the Center for Responsible Lending, since 2005 no new state has authorized high-cost payday lenders, and some that used to now do not. A couple of examples: In 2016 in South Dakota — a state not known for being ultra-progressive — 75% of voters supported Initiated Measure 21, which placed a 36% interest rate cap on short-term loans, shutting down the industry. In 2018 voters in Colorado passed Proposition 111 with 77% of the voters in favor. This, too, put an interest rate cap of 36% on payday loans. No state that has passed laws to rein in this usurious industry has undone such legislation.
A 2006 precedent: The Military Lending Act
Additionally, it is helpful to know that Congress has already passed legislation that Rosenstiel is concerned about – back in 2006. The Military Lending Act placed a 36% annual interest rate cap on small consumer loans made to active military service members and their families. Why? There was a concern that the loans that military members were getting could pose a threat to military readiness and affect service member retention! In 2015 the U.S. Department of Defense strengthened these protections.
People living in states with restrictions on small-dollar loans will not suffer. Instead, they will not be exploited and taken advantage of, and they will manage as they do in places such as New York, where such loans were never allowed.
We advocate placing an interest rate cap on payday and other usurious loans while supporting fair and equitable alternatives. Once an interest rate cap is placed on such loans, other products will emerge. Lenders will still be able to lend and earn a profit, but not at the expense of vulnerable borrowers. I’m glad the U.S. House Financial Services Committee will be debating this, and I’ll be supportive of the cap!
Sara Nelson-Pallmeyer is the executive director of Exodus Lending.
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