Regulating Payday Lenders in Minnesota

While reading the book Scarcity: Why Having Too Little Means So Much (referred to in this earlier post about how poverty causes bad decisions, rather than the other way around), I came across this fact:

There are more payday lender branches in the U.S. than McDonald's and Starbucks combined.

Specifically, there are 23,000 branches vs. 12,000 McDonald's and 9,000 Starbucks.

Scarcity gives short shrift to the idea of limiting payday lenders through regulation, but 15 states already ban the practice, and a group of Twin Cities religious organizations is gathering steam to improve regulation in Minnesota as well.

The coalition includes the Minnesota Council of Churches, Islamic Center of Minnesota, Minnesota Catholic Conference, and Jewish Community Relations Council.

According to the Star Tribune,

Among the recommendations: Limit the number of high-cost, short-term loans a person can get in a year, and close a loophole that lets lenders register as an Industrial Loan and Thrift, avoiding existing payday rules.

It also recommends payday lenders verify a borrower’s ability to repay, and ask about whether they or family are military members and subject to a 36 percent interest rate cap.

The Strib continues:

Payday lenders can lend up to $350 in Minnesota...and the state caps the interest rates at varying levels by loan amount. A two-week loan for $200 at the maximum 7 percent interest rate plus a $5 fee equals an APR of about 247 percent.

About 25 lenders in the state operate under those rules. But a handful don’t. The report said some lenders qualify as an Industrial Loan and Thrift, allowing them to charge higher rates.

Payday lending has doubled in Minnesota in the past five years (due mostly to the recession, I assume, but once they get a foothold, look out).

Colorado's regulation is considered the model. That state "requires lenders to offer payday borrowers a six-month installment repayment plan in addition to the standard lump-sum repayment."

The Star Tribune editorial endorsing the movement ends with a call for greater financial literacy. As Scarcity makes clear, however, financial literacy -- while a nice idea -- will not solve the problem. People experiencing scarcity operate in a psychological tunnel that precludes them seeing anything outside the tunnel. The authors have done numerous studies showing the tunnel works on anyone who ends up in a scarcity situation -- no matter what their overall level of education or financial well-being is.

The six-month installment repayment may be a worthwhile change, though, since spreading out the first repayment may keep borrowers from taking out new loans to pay off the old ones, which is what happens all too frequently. Let's hope so.