Patrick Rosenstiel’s recent essay on Community Voices said interest rate cap policies would create a less diverse and less inclusive economy. He says, “Consumers who turn to small lenders for high-interest loans are making 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 loans and predatory installment loans for Minnesotans caught in what’s called the payday loan debt trap, my point of view is, by experience, quite different from that of Rosenstiel.
In some cases consumer 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 intention of the lender. The average Minnesota payday borrower takes out seven loans before they can repay the amount originally borrowed.
Small loans, huge interest
Since 2015, at Exodus Lending, we have worked with 360 people who, when they came to us, were paying an average of 307% annual interest on their “little dollars” loans. This means that the loan may not have been large, but the amount these borrowers were 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 strongly support a 36% interest rate cap on these loans.
There are times when almost any of us can use a little extra cash – maybe the car battery is running out; a child’s growth spurt means they need 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 weather the storm, while still being able to pay our regular expenses. For others, it is a test. The answer, however, should not be a loan sharking at rates of 70%, 100% or more than 400% APR! Alternatives must be available for people to access. Even though companies may be able to make ridiculous amounts of money by taking advantage of people in their vulnerable financial situation, that doesn’t mean it’s a good idea.
Just ask the community members themselves! According to the Center for Responsible Lending, since 2005 no new state has allowed high-cost payday lenders, and some that previously did no longer do so. A few examples: in 2016, in South Dakota – a state not known to be ultra-progressive – 75% of voters supported the initiated Measure 21, which placed a 36% cap on interest rates short-term loans, shutting down the industry. In 2018, Colorado voters passed Proposition 111 with 77% of voters in favor. This also placed a 36% interest rate cap on payday loans. No state that has passed laws to curb this usurious industry has reversed such legislation.
A precedent from 2006: The Military Lending Act
Additionally, it’s useful to know that Congress has already passed legislation that concerns Rosenstiel – in 2006. The Military Loans Act placed a 36% cap on annual interest rates on small consumer loans made active military service members and their families. Why? It was feared that the loans the military got could pose a threat to military readiness and affect military retention! In 2015, the US Department of Defense strengthened these protections.
People living in states with restrictions on small dollar loans won’t suffer. Instead, they won’t be exploited and taken advantage of, and they’ll get by just like they do in places like New York, where such lending has never been allowed.
We advocate placing an interest rate cap on payday loans and other loan sharking while supporting fair and equitable alternatives. Once an interest rate cap is placed on these loans, other products will appear. Lenders will still be able to lend and make a profit, but not at the expense of vulnerable borrowers. I’m glad the US House Financial Services Committee is debating it and I will support the cap!
Sara Nelson-Pallmeyer is the executive director of Exodus Lending.
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