Minnesota Payday Loan Interest Rates May Rise
Inside Subprime: July 23, 2018
By Ben Moore
The state of Minnesota is now at risk of short-term lenders providing loans at interest rates normally deemed illegal within the state. Within the past few months there have been two bills proposed to Congress which could potentially encourage payday lenders in Minnesota to charge APRs on payday loans that would exceed the state limit.
Interest rate caps are unique per state, and banks, including branches of national banks, are held to the caps of the state in which they are located. The first bill, which was proposed by Indiana Republican Trey Hollingsworth, seeks to exempt “insured depository institutions and insured credit unions from the payday lending rule”, essentially allowing banks and credit unions to bypass the state mandated interest rate cap if they are not located in their home state. The bank or credit union would simply be held to the interest rate cap of their home state. If this were to come to fruition, a national bank based out of Utah would be able to utilize their Minnesota branches to provide loans with interest rates that are in accordance with Utah’s interest rate cap, not the cap in Minnesota.
The second bill, introduced by North Carolina Republican Patrick McHenry, pushes to amend several bills, including the Home Owner’s Loan Act and Federal Credit Union Act. Bank loans provided at the maximum federal interest rate that are subsequently sold to a third party will remain at the same interest rate regardless of the state mandated APR cap the third party is located in if this bill moves forward. This is a critical bill because there are many payday lenders with contracts in place with national banks that use that bank’s name on their loan documents. For a small fee to the bank, the lender will do all of the work needed to secure borrowers, including the marketing, underwriting, and servicing of the loans. McHenry’s proposed bill would allow these third party payday lenders to charge extremely high interest rates above the state’s legal limit.
In support of both of these proposed bills, Richard Hunt, the president and chief executive of the Consumer Bankers Associations has recently stated that, “there is a great need for short-term, affordable credit and banks have been historically able to fill that need for customers.” Hunt believes that the ability for banks to provide small loans at increasingly high interest rates will open the door for more banks to begin providing these loans, as they will now be a profitable avenue for the banks to take. Banks providing these small, short-term loans would subsequently bring payday loan borrowers into the national bank system as opposed to seeking small loans from what he calls “shadowy” payday lenders.
Scott Astrada, the federal advocacy director at the Center for Responsible Lending, disagrees with Hunt’s approach. He recently stated that “payday lending by any lender…is an abusive for of loan sharking” and will continue to trap borrowers in a cycle of debt due to unaffordable loans due to their high interest rates. However, time will only tell on whether these bills are able to be passed by Congress, or if they will be stopped due to the increasing risk of poor-credit borrowers drowning themselves in massive debt that many are seeing as paycheck-to-paycheck living.
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