Payday lending reform passes Michigan Senate

The Michigan Senate voted Thursday to cap annual interest rates on payday loans at 36%. That sends the legislation to the House.

Current law allows for borrowers to take out payday loans, referred to in the legislation as “deferred presentment service transactions,” for amounts up to $600.

With that, lenders can charge service fees based on a sliding scale. It starts with a 15% fee for the first $100, then 14% for the second hundred, 13% for the third hundred, 12% for the fourth hundred, and 11% for the fifth and sixth hundred dollars borrowed. Supporters of the interest rate cap said the current system can result in what are effectively triple-digit annual interest rates.

“Payday loans can often appear to be a life raft for families facing an unexpected expense or just need a bit of cash to make ends meet before their next payday. However, all too often, borrowers soon discover these loans are a trap,” Michigan League for Public policy President Monique Stanton wrote in a letter to the state Senate Finance, Insurance, and Consumer Protection Committee, where the bill was considered.

As an August 2018 report from the Center for Responsible Lending noted, borrowers often take out loans consecutively, using one loan to pay off another. Meanwhile, interest piles up on each loan while the amount borrowed remains the same.

In an example given in the report, a $500 loan can turn into $523.92 worth of fees if eight loans are taken out in that system.

Senator Sarah Anthony (D-Lansing) sponsored the bill to cap loan annual interest. She said her bill would keep the payday lending industry from preying on vulnerable Michiganders.

“What I think is that this will end the cycle of debt for a lot of Michigan families. I mean, whether we’re talking about folks who live in rural Michigan, in our inner cities, they’re disproportionately impacted by predatory loans,” Anthony said.

But some argue payday loans, while not ideal for many people, also provide a key service to those in need of quick cash to make it through an emergency.

“Finding yourself at the end of your paycheck when you have an urgent need like a car repair is a horrible place to be in. It’s made even worse if your credit card is maxed out, or you even can’t get a credit card due to bad credit. You’re stuck between a rock and a hard place. You ask for a loan from your family, if you can. But what if you can’t? That’s the space payday lenders have been filling,” Sen. Lana Theis (R-Brighton) said during a floor speech.

During the lead up to Thursday’s vote on the legislation, members of the payday lending industry argued the bill would cause severe harm.

John Rabenold is Chief Government Affairs Officer for the group, CNG Holdings, Inc., the parent company for Check ‘n Go.

“The footprint of our industry is shrinking,” Rabenold wrote in his own written testimony to the finance committee. “However, the demand for this source of short-term credit is growing. Regulating our industry out of existence will leave a gaping void in the marketplace.”

At least 27 other states already have regulations similar to the ones being considered in Michigan, according to the non-partisan state Senate Fiscal Agency.

Federal policy also caps the annual interest rate for military borrowers at 36%.

But Senate Minority Leader Aric Nesbitt (R-Lawton) argued the potential impact on the industry would lead borrowers to worse and unregulated alternatives.

“If you think payday lender interest rates are high, wait until you hear what your local loan shark charges,” Nesbitt said.

But Anthony isn’t buying that argument. She said in other states, the policy has led to more competition in the marketplace.

Anthony said it’s a “huge problem” if a business can only survive by accruing large amounts of interest on a loan.

“I’m not concerned with keeping industries open that prey on working families. I’m interested in making sure that we have consumer protection laws that keep people safe and don’t take a lot of their hard earned dollars,” Anthony said.

The legislation passed the Michigan Senate by a vote of 24 to 13, with four Republicans voting in favor.

Another bill in the package, which would require the state to publish an annual report on the payday lending industry, passed the Senate with unanimous support. It now heads back to the House for that chamber to agree to some changes the Senate made.