Ballot proposition would cap ‘predatory’ interest rates on payday loans

LANSING, MI — An election committee is working to put a question on the November ballot that would prevent payday lenders from charging “predatory” interest rates if approved by voters.

The Michiganders for Fair Lending campaign officially launched its petition drive Wednesday to cap high interest rates on payday loans that advocates say create a cycle of debt that becomes impossible to escape. The group said it wants to change the current payday loan landscape to one that gives access to small loans to those who need them, not one that creates a debt trap.

“Payday lenders target Michigan’s most vulnerable communities by offering quick cash that traps people in an endless cycle of debt with outrageously high interest rates,” said Josh Hovey, spokesman for Michiganders for Fair Lending.

“For years, state legislators have been urged to end predatory lending practices. People harmed by these loans cannot afford to wait any longer. That is why we will be taking the issue directly to the voters this November.”

In Michigan, the typical payday loan has the equivalent of an annual percentage rate (APR) of 370%. The Michiganders for Fair Lending proposal would limit payday loans to no more than 36% APR.

Payday loans are marketed as short-term, but the vast majority of borrowers get stuck in a cycle of long-term debt, fair lending advocates say. About 70% of payday borrowers in Michigan borrow again the same day they pay off a previous loan, according to research by the Consumer Financial Protection Bureau. The same study found that the average payday loan borrower ends up taking out 10 loans over the course of a year.

Michigan Attorney General Dana Nessel describes a payday loan as a short-term, high-cost transaction in which customers borrow money in exchange for a service fee. Michigan law calls this type of loan a “deferred presentment servicing transaction” because the customer’s check is held for a period of time before it is cashed. Loans are not like car payments in that borrowers cannot make installment payments.

Payday loans have high service fees and a short repayment period. For example, a customer who borrows $100 for two weeks and is charged $15 will pay a service fee equal to a triple-digit APR. The actual cost of the two-week loan is $15, which equates to an APR of 391 percent. And that still doesn’t include additional fees for “eligibility checks” or processing.

Payday loan stores often allow customers who can’t repay the loan to get a second payday loan to pay off the first. Service fees can get the customer stuck in a cycle of debt.

“It’s a slippery slope,” Nessel said in a consumer alert focused on the process.

Fair lending advocates say payday loan shops are undeniably predatory. The stores implement manipulation tactics and enter customers in a process that creates a cycle of debt that traps people in poverty, Hovey said.

“Stopping predatory lending is an issue in Michigan that resonates across parties, geographic regions, ages and income levels. Even in today’s divisive climate, this is an issue the vast majority of people can agree on,” said Jessica AcMoody, policy director for the Michigan Community Economic Development Association.

“Lenders know they are getting their money because they are given direct access to the borrower’s bank account and can get their own money back before the borrower can pay rent, utilities or groceries. With no funds left over for basic living expenses, guess what happens? You guessed it. The borrower comes back to take out another loan,” AcMoody said.

Gabriella Barthlow, a financial counselor for the Macomb County Veterans Service, said she has seen how the veterans she works with have been affected by the predatory payday lending process. Military veterans are particularly vulnerable to predatory lending, Barthlow said.

“As a predatory lending target community, it is critical that veterans understand the risk associated with payday loans and the importance of a 36% interest rate cap,” Barthlow said.

The 36% APR limit used by many states is similar to the National Military Loan Act, which establishes consumer credit protections for active military members. Congress passed the law in 2006 after the military discovered that payday lenders were setting up stores near military bases.

Dallas Lenear of Project Green, a Grand Rapids-based financial education nonprofit, said he was motivated to help try to change the laws after hearing first-hand stories about excessive interest rates catching people in financial ruin.

“Payday lenders are exploiting our most vulnerable communities and neighbors without consumer protections,” said Dallas Lenear of Project Green in Grand Rapids. “People go to payday lenders because they feel like they don’t have a choice. They get stuck in quicksand that traps them for months and sometimes years.”

Payday lenders also disproportionately locate their stores in communities of color. Statewide, there are 5.6 payday loan stores for every 100,000 residents. That number is 25% higher in majority black communities, Lenear said.

Michigan would join 18 other states and Washington DC that have set a payday loan rate cap at 36% APR or less. Voters in Nebraska, Colorado, South Dakota and Montana have enacted caps on payday loan rates through a ballot measure that received more than 70% voter approval.

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