Minnesota caps payday loan rates – with a wrinkle

A law signed by Minnesota Governor Tim Walz will prohibit payday lenders from charging annual interest rates above 50%. Payday lenders who charge between 36% and 50% will also need to assess borrowers’ ability to repay loans.

Eva Marie Uzcategui/Bloomberg

Minnesota payday lenders will be prohibited from charging annual interest rates above 50% under a measure the state’s governor signed into law.

The law is the latest victory for consumer advocates, who want to implement 36% price caps nationwide, a step they say is necessary to avoid exorbitant fees for low-income consumers.

Minnesota law is not a 36% rate cap, but placing strict limits on payday loans with rates between 36% and 50% could significantly reduce product availability.

The law will “disrupt the predatory business model” of payday lenders so they stop “creating long-term debt traps for consumers,” said Yasmin Farahi, deputy director of state policy at the Center for Responsible. Lending.

Payday borrowers in the state are paying an average annual percentage rate of 220% and they often roll over their debt because they are struggling to repay the original loan, the group said.

Payday lenders had pushed back Minnesota legislation, warning that a strict rate cap could push them out of business and limit options for consumers who need emergency money.

INFiN, a trade association that represents payday lenders, said that the 36% rate caps are leaving cash-strapped consumers “to face the high costs and consequences associated with missed bills, late payments or illegal loans” as payday lenders go out of business.

Farahi countered that consumers will be able to turn to lower-cost options, including low-cost loan products that major banks deploy and an offer from Exodus Lending, a Minnesota nonprofit that helps consumers refinance payday loans.

While Minnesota payday lenders will still be able to charge rates between 36% and 50%, the new law will require them to perform an analysis of consumers’ ability to repay their loans.

This analysis will take into account borrowers’ income, living expenses and other outstanding debts.

The payday loan industry fought these repayment capacity requirements at the federal level, and their efforts left a Consumer Financial Protection Bureau rule targeting payday lenders in legal vacuum for years. The industry has also opposed efforts to implement a 36% nationwide price cap — a measure proposed by some Democrats that has consistently failed to garner enough support legislators.

Farahi said while a 36% rate cap would be ideal, Minnesota’s repayment capacity standard for payday loans will limit harm to consumers. “We’re really optimistic about it,” Farahi said, expressing confidence in state regulators’ ability to take action if a lender breaks the rules.

The measure, part of a larger package that the state’s Democratic Governor, Tim Walz, signed into law, will go into effect Jan. 1.

Twenty states, as well as the District of Columbia, now have either 36% rate caps on payday loans or strict measures that protect consumers from repeated debt rollovers, according to the Center for Responsible Lending.