This week, the U.S. House of Representatives is expected to vote to roll back Wall Street regulations designed to avoid the kind of economic collapse that happened in 2008. The Financial Choice Act, the GOP’s answer to repealing Dodd-Frank, carries provisions that would once again allow big banks to take greater risks and theoretically free small community outfits from regulations.
But one tiny provision, buried hundreds of pages into the enormous bill, clearly isn’t meant to help regular people. Section 733 would kneecap the federal Consumer Financial Protection Bureau’s efforts to regulate payday lenders.
Payday lenders typically operate in low-income neighborhoods to provide short-term emergency loans to desperate people for a steep fee. Minnesota caps those fees at 10 percent of the loan, but consumers often can’t afford to repay the loans in time, and there’s no cap on the interest rates they can incur.
According to the CFPB, payday loans carry an average annual interest rate of more than 300 percent, plus other fees.
“For too many consumers, payday and deposit advance loans are debt traps that cause them to be living their lives off money borrowed at huge interest rates,” said CFPB Director Richard Cordray in 2013.
Three years later, the CFPB proposed rules that would require payday lenders to first determine if consumers can pay back their loans without destroying their lives.
And that’s what the Financial Choice Act wants to stop.
Sara Nelson-Pallmeyer of Exodus Lending, a Minnesota nonprofit that tries to rescue payday borrowers from never-ending debt, has watch Congress train its sights on the CFPB post-election, and isn’t surprised at all that the agency’s payday proposals might be short-lived.
The CFPB’s ideas were good ones, she says, even though they didn’t go far enough to put interest rate caps on loans.
Still, that’s something that could still be accomplished by individual states.
Last year, South Dakota had a referendum over that exact issue, and an electorate that overwhelmingly supported Donald Trump nevertheless voted to limit payday interest rates at 36 percent. As a result, payday lenders quit doing business in the state, as acknowledging its entire business model relies on interest rates of 300 to 400 percent.
“This is not a Republican, Democrat issue,” Nelson-Pallmeyer says. “I think it’s a great example, because when I try to bring it up to legislators here, they’re like, ‘Well, nothing’s going to happen because we have a Republican-controlled legislature.’ I say look at South Dakota. The people who were working for the 36 percent interest rate cap were outspent 15 to one. And they won.”
The Minnesota legislature last attempted to cap payday interest in 2014, when DFLers Rep. Joe Atkins (now retired) and Sen. Jeff Hayden (Minneapolis) championed a bill that died on the vine in the House.
Payday lenders spent big to kill the bill, arguing that they provide an essential service to people who live paycheck-to-paycheck and find themselves in need of an emergency cash advance.
Yet there are 15 states in which payday lending is illegal.
“People are going to do what they did before payday lending existed,” Nelson-Pallmeyer says. “They’re gonna do what they do in New York and in other states where it doesn’t exist. They’re going to go to their family members, their employers to ask for a couple more hours’ shift, work for an increase in minimum wage. Payday lenders don’t need to exist.”
The Minnesota legislature didn’t take up payday loans this year, partially because everyone was looking to see what would become of the CFPB’s proposed regulations at the federal level, says Anne Krisnik of the Joint Religious Legislative Coalition, which runs the Minnesotans for Fair Lending campaign.
But now that Republicans are sneaking a single sentence buried in a 600-page bill, local advocates may have to return to the war room.
Sen. Hayden, who carried the failed 2014 bill, says he didn't want to attempt again this session because he felt the Republican majority wouldn't be interested, and because of the turbulence at the federal level.
"Next year, when we understand what the Trump administration’s gonna do as we gear up for the next legislative session, I really do plan to sit down with the advocates and see if we could build a strong bill that starts to deal with this issue," Hayden says.