Payday loans become reform target for MN lawmakers

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Here's a recent USA Today headline: "Payday loan fees can trap you,"

Another one from the L.A. Times: "Most payday loan borrowers get stuck in 'revolving door of debt'"

And this story courtesy of the Boston Globe: "Payday loans: a high-cost trap."

Sensing a theme?

The concern over payday loans has some Minnesota lawmakers' attention too – enough where the Senate commerce committee approved a bill that limits the number of payday loans a Minnesotan can take out, Forum News Service reports. The Senate measure caps the number at eight payday loans per year, with a loan-free period of at least 45 days, Forum reports.

The bill will go to the Senate floor for a full vote.

According to Forum, tearful testimony from both sides made the hearing emotional.

A Duluth mother of four told the Senate committee she got a payday loan that "just started spiraling."

She detailed her experience to a House committee as well last month. She needed money in 2005 to buy her kids Christmas presents, didn't realize how high the interest rate was, and eventually took out multiple loans. At one point she was coughing up $600 a month just in interest to pay back the short-term loans.

“I ended up in a shelter because I couldn’t pay my rent,” she told the House committee. “I’m now in transitional housing, but this happened in 2005. If I’d had other options, I never would have done it.”

On the other side, Forum reports, people testified to the Senate committee how important the payday loans were to their lives.

Teri Frye, a mother from Blaine, said she doesn't make enough money at her Target job to cover expenses. She borrows $150 at a time and pays back $178 – a fair rate, advocates say, when compared to overdraft fees from banks, Forum reports.

“I don’t have time to come down here to St. Paul and ask you not to take away my financial rights,” Frye told the committee. “If Payday America is gone, I have no idea what I will do.”

Sen. Jeff Hayden, DFL-Minneapolis, actually pushed for stricter guidelines originally, which would have limited it to five payday loans per year. The committee rejected it, a cap of 12 per year was suggested, but a compromise by Sen. Roger Reinert, DFL-Duluth settled it at eight. The committee passed it by an 8-5 vote.

A companion bill in the House is working its way through a commerce and consumer protection committee.

MinnPost wrote a piece about the short-term loans and the financial stress they can put on people and families already struggling with money.

The site cites a report by the group Minnesotans For Fair Lending, which said $82 million was drained from Minnesotans from 1999-2012 simply because of payday loan fees. Broken down by region, the report said suburban Minnesota was hit the hardest:

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The study describes payday loans as "a cycle of long term debt" marketed as a quick financial fix.

"In Minnesota, payday loans carry, on average, a 273% annual interest rate for a $380 loan," it says. "A typical Minnesota payday borrower is stuck in 10 payday loan transactions a year and, in 2012, more than 1 in 5 borrowers were stuck in over 15 payday loan transactions."

The Federal Trade Commission (FTC) breaks down how a short-term payday loan works. It's a cash advance, where the payday agency gives out a small loan to a borrower – the borrower gives the agency a check in return, written out for the amount of the cash advance plus a fee. That check is then cashed on the borrower's next pay day, or the loan is rolled over (this can also be done with an electronic transfer instead of a check).

A $100 loan with a $15 fee, rolled over to the next week, suddenly costs $130 to pay back. Two more rollovers and it's $160.

The agency urges caution with the loans, saying that regardless of their name, they come at a very high price. The agency also offers alternatives, such as getting a small loan from a credit union, contacting your creditor if you need more time, and considering overdraft protection from your bank

The Consumer Financial Protection Bureau says nationally, four out of every five payday loans are rolled over or renewed within 14 days; meaning 80 percent of borrowers can't pay the high-interest loans back on time.

According to The Tennessean, federal regulators are preparing to offer reforms to the industry. But the payday loan agencies say they offer options for consumers in need of quick help – when they may not have anywhere else to turn.

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