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.
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.
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%. In the end though, payday lenders remained a predatory force in Colorado, particularly in communities of color.
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.
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.
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.
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. 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.
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.
 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.
 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
 Center for Responsible Lending, “Mile High Money: Payday Stores Target Colorado Communities of Color.” 2017.
 Griffith, Hilton & Drysdale, “Controlling the Growth of Payday Lending Through Local Ordinances and Resolutions.” 2012.
 Ibid. Pg. 35.
 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/
 Poyaoan, “How Lending Circles Create Community Resilience.” 2013. https://www.shareable.net/blog/how-lending-circles-create-community-resilience