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Debtors kept from the deep end

Published (3/13/2009)
By Kris Berggren
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Advocates of payday lending say the short-term, small loans they advance against a paycheck serve people who are short of cash in tough times. Opponents say the “serial borrowing” that results as those loans often roll over and accumulate huge interest charges is like “quicksand” that sinks desperate people deeper in debt.

Rep. Jim Davnie (DFL-Mpls) introduced a bill that would tighten payday lending rules and create penalties for lenders who violate them.

He told the House Labor and Consumer Protection Division March 6 that HF914 would “strike the appropriate balance” between interests of above-board lenders and those of constituents “challenged by stagnant wages and rising health care costs of the last decade, exacerbated by layoffs, falling home values … and a collapsing stock market.”

The bill would prevent “loan churning” by limiting lenders to two such loans to the same borrower in a 12-month period, with a few exceptions. Penalties for noncompliance would apply to any loan made to a Minnesota resident, even if made on the Internet.

Opponents said the bill would hurt legitimate businesses making such loans and the customers who rely on them to make ends meet in emergencies.

Industry advocates say limiting loans will drive borrowers to less reputable sources such as Internet lenders, or border states with higher rates.

Paul Cassidy, an attorney representing Payday America, the largest Minnesota short-term lender, said its average fee on a $350 loan is less than 10 percent. In contrast, it costs $38.50 for a $300 cash advance from similar Iowa lenders, $22 for $100 in Wisconsin and $15 for $100 in South Dakota, according to Remi Stone, a lobbyist representing Advance America, which operates in 33 other states.

She said the solution to borrowers’ money management woes is educating for “comprehensive financial literacy.”

The division approved the bill and sent it to the House Commerce and Labor Committee. Its companion, SF806, sponsored by Sen. Kevin Dahle (DFL-Northfield), is scheduled to be heard March 17 by the Senate Commerce and Consumer Protection Committee.

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