Payday Lending Part 3: Solutions for Minneapolis

Fighting Predatory Lending in Minneapolis

In the first two articles of this series, we talked about payday loans: what they are, why they’re bad, and what some other communities have chosen to do about it. Today, I’m going to be diving a little bit deeper into what I think might work to combat predatory lending here in Minneapolis, and in Minnesota more broadly.

Great. So I remember that last time, we talked about four major options for limiting payday lenders around the country: banning them, financial regulations, business regulations, and building alternatives. Which ones do you think we should try here?

Actually, all of them. I think the most effective strategy is one with a couple of different potential solutions that strengthen and reinforce each other. That’s why Blexit is looking at three separate tactics for disrupting payday lenders: passing a fair lending ordinance at City Hall, pushing legislators to pass state-wide fair lending laws, and building a community lending service of our own.

Sounds like a lot of work. Why all of them, instead of just picking one to start with?

Well, because each option has its own advantages and limitations.

  • We have a strong, progressive majority at City Hall, making it easier to get support for restrictions against predatory lending, but they can only pass local laws, and many payday lenders are in the suburbs or rural areas.
  • The state legislature has a lot of power over payday lenders, but they’re going to be tougher as a whole to convince of the necessity of fair lending laws.
  • Building a better alternative to payday loans is going to make the most difference—if people can get their financial needs taken care of without being forced into a cycle of debt, it’ll make payday lenders unnecessary. That said, opening a community lender won’t put an end to payday lenders overnight - that’s why we have to pass local and state level policy.

Passing a Fair Lending Ordinance in Minneapolis

Got it. So what do you want to do at City Hall?

Well, first things first, we should make it illegal for new lenders to open up, and for current lenders to expand. We already have too many payday lenders, and we shouldn’t let new ones move in, especially while we’re considering stricter policy.

Makes sense. What’s the end goal, though?

Ideally, the city would ban payday lenders entirely, and pass a resolution formally asking the state legislature to pass an interest rate cap on consumer loans.

What if they’re not willing to go that far?

Putting a hard cap on the number of lenders in the city limits would be worthwhile. So would requiring the lenders to operate outside of communities with above average poverty rates. There are lots of options here—none of them as good as an outright ban, but still worth considering. We can look to other cities that have passed laws against payday lending for inspiration - I gave some examples in my second blog.

Pushing Legislators to Pass State-Wide Fair Lending Laws

Sure. Okay, how about the state legislature?

As I mentioned before, an interest rate cap is probably the way to go. Under most conditions, lenders can’t charge more than 36% interest for a consumer loan. Many states, including South Dakota, have successfully passed laws preventing payday lenders from charging any more than that. If we passed an interest rate cap, predatory payday lending would become nearly impossible.

Sounds like a good plan.

Thanks. If that’s not workable, we could look to some other solutions. The CFPB’s new payday lending rule probably won’t ever go into effect at a national level, but we could pass it into law at the state level. It wouldn’t end predatory lending, but it might help to make the consequences of taking out a payday loan less horrible.

Wait, isn’t Republican control of the state government going to make all of this impossible anyways?

Not necessarily. There are tons of Republicans who hate payday lending—in fact, as I mentioned last week, the state with the most municipal limitations on lenders is Texas, of all places! If they can pass laws against payday lending there, we should be able to make it happen here—regardless of how much money payday lenders are donating to legislators’ campaign funds.

Building a Community Lender of Our Own

Okay I get all that, but what’s this about starting a community lender?

It shouldn’t be painful to borrow money. Everyone has a little trouble making ends meet from time to time, and we should have a support network to make sure people get their needs taken care of. Unfortunately, living in a capitalist society, too often the only options for folks in need do more harm than good. We can do better.

What would better look like to you?

Well, there are some good things about payday lenders: they allow almost anyone to borrow money quickly and easily, no questions asked. But when you get that money, you have to pay it back, plus an incredibly high fee, within two weeks, all in one sum. That’s no good. I’ve been working with our friends at Village Trust Financial (also known as the Association for Black Economic Power) to come up with ideas, and they’ve decided to start a consumer lender that’s accessible to the whole community, offers low interest rates, and gives the customer flexible repayment options.

Wow. If that existed, why would anyone go to a payday lender?

They wouldn’t! That’s the whole point.

Wait, so what would the loan APR be? How would the business be classified? Who would be eligible for loans? Where would it be located? How could y-

We'll be talking more about that in the next few weeks. For now, don’t hesitate to reach out to us to get involved in our work. Again, my email is tony.voss.williams@gmail.com. Feel free to reach out to me with ideas, concerns, or feedback around these ideas—nothing is set in stone, and we’d love to hear from you. See you soon!


Payday Lending Part 2: Solutions to Payday Lending

Last week, we discussed payday lending – what it is, how it works, and why it’s bad. This week we’ll be looking into what people are doing about it across the United States. Obviously, every state and city is different, and the solutions that work for Minneapolis will be different than the solutions that work in other places. But there’s still a lot that our city can learn from what’s happening elsewhere. Let’s get started:

How are people trying to limit the harm done by payday lenders?

There are a number of different strategies. The big ones, as far as i can tell, are banning payday loans completely, financial regulations, business regulations, and building alternatives. I’ll go through them one at a time, starting with bans.

Banning Payday Loans

So there are communities that completely ban Payday Loans?

Yeah, a bunch of them. The laws are changing all the time, but more than a quarter of states (and the District of Columbia!) don’t allow payday lending at all. If you want a loan in those states, you have to get a longer-term loan with a lower interest rate.[1]

How does that work out? What do people do if they need short-term cash?

People end up getting short term cash in many of the ways you would expect: selling stuff, borrowing from friends or family, or cutting back on short term expenses. It’s not ideal, but it’s definitely better than getting trapped in a cycle of debt for months, and paying back way more than you borrowed because of crazy high fees.

Financial Regulation

Okay, so “banning payday loans” doesn’t sound like a horrible option. What about financial regulation?

There are a lot of options there. One simple one is requiring lenders to make sure that their customers actually have the money to pay back the loans. A government agency called the CFPB (Consumer Federal Protection Bureau), which was established after the financial crisis in 2008, just issued a legally-binding rule requiring that lenders stop making loans to people who can’t afford them, starting in 2019.

And all Trump’s people in Congress are really gonna let them do that?

Probably not, hahaha. We’ll find out! But regardless, we should be looking at other options, locally and at statewide levels, for financial regulation of payday lenders.

Gotcha. So what other financial regulation options are there?

Well, you can cap the amount they charge. Normal bank loans are capped at a 36% Annual Percentage Rate (APR). That means if you took out a loan of $100 for one year, you’d end up paying back $136 – the $100 you borrowed, plus $36 in interest. Like I mentioned last week, payday loans are usually much more expensive than that, with APRs of 300% or more. Research shows that lenders usually charge about as much as they’re legally allowed to. So we can require that they charge less. Actually, one of the best examples of this is in the military: the Department of Defense found that soldiers were getting taken advantage of payday loans, so they made it illegal for payday lenders to charge more than a 36% APR to people in the military.

Wait really? So the military made it so that soldiers can’t get taken advantage of, but nobody else gets that protection?

That’s right. Other than restricting interest rates, some other financial regulations that work well are restricting the amount of rollovers payments payday lenders can offer, and requiring payday lenders to let customers pay back their loans over time.

Wait, that sounds like it would be useful.

Sort of. Colorado passed a pretty successful law in 2010 requiring that all payday loans be paid back over time instead of all at once. It helped customers a lot at first – the average loan APR went from 319% to 115%, and costs to borrowers went down by 42%.[2] In the end though, payday lenders remained a predatory force in Colorado, particularly in communities of color.[3]

Business Regulations

Cool. You also mentioned business regulations?

Yeah, a lot of cities have wanted to slow down payday lenders, but haven’t been able to regulate them financially because of state restrictions, so they put limits on them through city business laws instead.

What does that look like?

Depends on the place. Cities have passed laws regulating payday lenders everywhere from Texas to California, and the laws are different everywhere. Sometimes cities use their authority to regulate businesses to ban payday lenders altogether.[4]

What can cities do other than banning them?

Usually they try to do stuff like limiting how many of them are allowed to open in the city, or in specific neighborhoods. Sometimes they make it illegal for payday lenders to operate too close to one another. Some cities even regulate the hours payday lenders can be open. For example, just across the border from Duluth in Superior, Wisconsin, payday lenders are limited to highway commercial areas, and can’t be within 2,500 feet of each other or 300 feet of a residential zone. There can’t be more than one payday lender per 5,000 residents, and payday lenders can’t be open outside the hours of 8 am to 10 pm.[5]

Alternatives

Right. I get that restricting payday lenders is probably better than letting them run wild, but sometimes people run into emergencies and need help. What alternatives to payday loans are people working on around the country?

Actually, Minnesota happens to be one of the most innovative places for alternatives to payday loans.

Really?

Yeah, we have two local organizations that have been doing cool work around payday loans: Exodus Lending and Sunrise Banks.

What does Exodus Lending do? Do they offer loans on better terms than payday lenders?

Yes and no. Basically, Exodus is a nonprofit started in 2015 whose mission is to get people out of payday loan debt. So people who have payday loan debt can go to them for help. Exodus pays the payday loan off in one big payment, and then the customer pays off Exodus over a longer period. Exodus does other things for people with payday loan debt too – if you save a certain amount of money, they’ll double it.

How are they doing?

Great! In February 2017, they announced that they’d made their hundredth loan.[6] Hopefully they’ll be helping folks get out of debt for a long time.

What about Sunrise Banks? What’s up with them?

Well they’re a bank headquartered in St. Paul that introduced this new alternative to payday loans called TrueConnect. Basically, Sunrise makes an agreement with your employer, and they offer you a loan of anywhere from $1000 to $3000. You pay back Sunrise through gradual payroll deductions, the same way most people pay taxes. And your employer doesn’t have to do anything, just confirm your income and allow Sunrise to take repayments out of your paycheck.

Sounds convenient, but are the prices better than normal payday loans?

Way better. Their average APR is around 25%, around how much it costs to use a credit card. The biggest problem with it as an alternative to payday loans is that your employer has to sign onto it – if they’re not interested, you can’t get a loan.

What other options do we have?

Black folks have a long history of helping each other out without getting outside lenders involved. For example, many community across the Black diaspora come together in “lending circles”- groups of people who put aside a bit of money on a regular basis to provide financial support to each other when things get rough.[7]

All that said, we don’t have a perfect alternative to payday loans yet—one that allows people to get their financial needs met quickly and without being taken advantage of. That’s why we here at Blexit have been working on creating that alternative. We’ll have more info to share soon.

That sounds super cool. Seems like we have a lot of places we could get started.

Sure does, doesn’t it? This Friday we'll be hosting a Facebook Live event to talk about what we think might work for Minneapolis. Join us! https://www.facebook.com/events/231337314100630/. If you can't make it,I'll be back next week with another blog post about what our next move in Minneapolis might look like.

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[1] Pew Charitable Trusts, “Payday Lending in America: Who Borrows, Where They Borrow, and Why.” 2012. Pg. 20. http://www.pewtrusts.org/~/media/legacy/uploadedfiles/pcs_assets/2012/pewpaydaylendingreportpdf.pdf.

[2] Pew Charitable Trusts, “Trial, Error, and Success in Colorado’s Payday Lending Reforms.” 2014. Pg. 5-6. http://www.pewtrusts.org/~/media/assets/2014/12/pew_co_payday_law_comparison_dec2014.pdf

[3] Center for Responsible Lending, “Mile High Money: Payday Stores Target Colorado Communities of Color.” 2017.

[4] Griffith, Hilton & Drysdale, “Controlling the Growth of Payday Lending Through Local Ordinances and Resolutions.” 2012.

[5] Ibid. Pg. 35.

[6] Exodus Lending, “Exodus Lending, An Alternative To Payday Lenders Makes 100 Loans In Less Than Two Years.” http://exoduslending.org/2017/02/10/exodus-lending-an-alternative-to-payday-lenders-makes-100-loans-in-less-than-two-years/

[7] Poyaoan, “How Lending Circles Create Community Resilience.” 2013. https://www.shareable.net/blog/how-lending-circles-create-community-resilience


Payday Lending Part 1: What Is Payday Lending?

Hi! My name is Tony Williams, and I’m going to be working with Blexit for the next three months as their Payday Lending research fellow.  Over the past year or so, Blexit has been having a lot of conversations about payday loans, mainly focusing on how they take wealth out of Black communities. I was brought on to help Blexit do research on payday loans so we can figure out how to prevent our people from getting caught in the traps they set for us, once and for all.

A little about me: I’m an artist, writer, and activist from Minneapolis. I graduated from Santa Clara University in 2015, and moved back to the Twin Cities to be a community organizer. I’ve been doing racial justice organizing ever since, everywhere from boardrooms to highway shutdowns. When I’m not doing that, I make things: I’ve been a rapper for more than a decade, and I’ve recently branched out into performance and installation work too. I make art because I think the world needs new perspectives and ways of thinking, and I’m happy to be able to bring that to this work, too.

As part of this fellowship, I’ll be posting what I’ve learned regularly on this blog so we can share info. This week we’re going to take a look at the basics of payday loans and the problems they create for people in our communities.

What are payday loans?

Payday loans are expensive short-term loans marketed to people who need cash fast. Basically, they’ll give a loan to anyone who shows up with paycheck stubs. They don’t require collateral, a bank account, or credit checks. All you have to do is fill out a check with the full amount of the loan, plus a service fee, and they automatically take the money out of your account on your next payday. Unlike most loans, you have to pay back the whole amount at one time. But if you can’t, and you want to extend the loan, you can choose to just pay the service fee, and renew the loan so that you can pay it on your next payday.

Sounds convenient.

Sure does, huh? That’s how they get you. In reality, payday loans are really dangerous: they lure in the people who need money most, then trap them in a cycle where they keep renewing their loans without ever having an opportunity to pay them off. Despite payday loans being marketed as “short-term loans,” the average person has to keep renewing their loan for five months before they can pay it off. And those service fees are crazy expensive: the average borrower ends up paying $520 in service fees for a $375 loan.  Payday loans are marketed as a way to make things easier, but research shows that they actually make things much harder for most people who take them out.

So why would anyone take a payday loan out?

A lot of folks don’t have a choice. It’s hard to get a less-expensive traditional loan if you don’t have a bank account, credit history, or a reliable income. For people who don’t have friends or family with money, stuff to sell, or good credit, payday loans can be the difference between paying your bills and getting evicted. 69% of first time borrowers take out payday loans to catch up on normal expenses, and another 16% take them out because of an unexpected emergency.

Other folks just get tricked: payday lenders advertise “short-term loans” to people, but never tell them that the majority of borrowers take months to repay their debt, rack up hundreds of dollars of service fees, and end up having to go somewhere else to find the money to repay the loan.

That sucks.

Absolutely. And who do you think gets taken advantage of the most by payday lenders?

Gotta be Black people, huh.

Yep. If you just look at the number of customers, most payday loan customers are white. But looking at the odds a given person takes out a payday loan tells a different story. A Black person in America is more than twice as likely as a white person to take out a payday loan. 12% of Black people have taken out a payday loan at some point in their life, compared to 4% of white people.

So let me get this straight: payday loans are horrible for people’s finances.

Uh-huh…

And Black people are most likely to have to use payday loans.

Yep…

So basically they’re just another example of the white supremacy inherent in capitalism, and the ways in which the economy is split into two: one where you’re white, and you’re more likely to have access to savings, bank loans, or friends to borrow money from, and one where you’re Black, where centuries of denial to even the most basic of wealth-building tools have been given you few options but to flee into the arms of predators to meet your day to day needs?

Yeah that sounds about right.

And then those predatory lenders charge you insane amounts for access to tiny amounts of money, preventing you from effectively building wealth to escape the cycle of debt?

You got it.

Bummer. How many of these lenders do we have in Minnesota?

Dozens – nine just in Minneapolis alone. Most of them are on Broadway or Lake Street, of course.

Is there anything we can do about them?

Definitely. We have lots of options to confront payday lenders – requiring them to be more transparent with their customers, passing laws that limit how much they can charge, and building community-centered alternatives, for starters. More than a quarter of states don’t even allow payday lending at all. Next week, we’ll talk about some of the work being done around the country to disrupt payday lenders and destroy the debt traps that they create. See you then.

 

If you have ideas about how to fight payday lenders, or want to get involved in our work, please feel free to reach out. You can reach me at tony.voss.williams@gmail.com.

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Sources:

Pew Research Center, “Payday lending in America: Who Borrows, Where They Borrow, and Why.” 2012

http://www.pewtrusts.org/en/research-and-analysis/reports/2012/07/19/who-borrows-where-they-borrow-and-why

Brian Melzer, “The Real Costs of Credit Access: Evidence from the Payday Lending Market.” 2007

http://www.kellogg.northwestern.edu/faculty/melzer/Papers/realcosts_melzer_07.02.09.pdf

MN Department of Commerce data on payday lenders

https://mn.gov/commerce/


Taking Up The Community Mandate - Introducing Blexit Fellow Tony Williams

Blexit Core Team members Me'Lea Connelly and Jonathan Banks warmly welcome Tony Williams. As the first Blexit Fellow, Tony is taking on a community mandate and working to find solutions for payday lending schemes that entrap our friends and neighbors. You can follow Tony's work on blexitmn.org, where he'll be posting new research and insight into payday lending each week. And don't hesitate to get in touch - if you have ideas about how to fight payday lending, shoot him an email at tony.voss.williams@gmail.com.

 



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