The DebtHammer Newsletter: Issue #2

Lawmakers press forward as the battle continues.

Payday lenders have been under fire for years now. Most of America’s left-leaning states have long seen the industry’s excessive interest rates as immoral, and the red states are increasingly coming around to that same point of view.

Ironically, payday lenders’ transition to the internet seems to have hastened their inevitable doom. People can now place online payday lenders’ rates right next to those of a credit card, and the disparity is visibly upsetting.

Even payday lenders’ general online profiles stand in sharp contrast with more consumer-friendly online lending options, such as peer-to-peer lending apps and cash advance services like Earnin.

The sheer difference in the number of negative consumer reviews and complaints is enough to give even the most cynical people pause. It seems inevitable now that the fight against payday lending can only end one way.

Speaking of, let’s take a look at how the war efforts are going.

Where Were We?

In the last issue of the DebtHammer Newsletter, Nebraska joined the ranks of states cracking down on payday lending. 

83% of Nebraskan voters supported Proposition 428, which imposed fairly standard payday loan restrictions. They limited principal amounts to at most $500, repayment terms to at least 34 days, and APRs to at most 36%. 

We also predicted that the trend of limiting payday loans would probably continue nation-wide with President-Elect Joe Biden taking office. It’s still too soon to comment further on what steps Biden will take, but that doesn’t mean that the efforts are waiting for him.

Nevada Fires a Warning Shot

Nevada is undergoing a not-so-quiet metamorphosis. Through the 1980s, they generally voted Republican on most matters. But that changed in the following decades as the population grew.

In fact, it more than tripled, going from less than a million people in 1980 to over three million in 2020. That influx of people made it one of the few states in America where minorities are the majority. And it’s lead to Nevada voting Democrat in the last four presidential elections.

Despite the shift, the state is still lenient to payday lenders. The practice has always been legal in Nevada, and there are few meaningful restrictions on what lenders can do. 

There are no limits on interest rates, finance charges, or rollovers. Apart from the rules that principal balances can be no more than 25% of gross income and that the maximum loan term is 35, payday lenders run free.

But the state’s new political leanings are beginning to show themselves. As 2020 wound to a close, state lawmakers permitted financial regulators to start a state-wide database for payday loans and lenders.

The database would help protect consumers by:

  1. Keeping lenders accountable for verifying that borrowers can legally afford their loan
  2. Allow consumers to track lender dealings and better understand what they’re offering

It’s not a death sentence for the industry, but it’s certainly a warning shot. Visibility and consumer education is a payday lender’s Achilles heel.

State officials hope that it will be the first step toward meaningful oversight and regulation, which can only benefit the Nevadan people.

An Unexpected “City On A Hill” in the Land of Lakes

States like Nevada aren’t the only ones picking up the fight. City officials in Moorhead, Minnesota, have also decided that it’s time to rein in payday lending. 

Their local city council member, Heidi Durand, decided to try for one last push before leaving office. She lead the council to pass a program that limits payday lending in the following ways:

  • No more than two payday loans per person in a calendar year
  • Principal balances not to exceed $1,000
  • Minimum payback terms are 60 days
  • APRs can be no more than 33%

There was a public hearing before the regulations went through in which only two people opposed the new regulations. Unsurprisingly, they were the owners of Greenbacks, one of the only payday lending companies in the city.

They claimed that they wouldn’t be able to continue operating under the new laws and that they planned to close up shop at the beginning of 2021. Greenbacks and Peoples Small Loan Co. (the other payday lender in the city) have both since seemingly closed.

The city council, allied with other local groups like the Minneapolis Area Synod and Minnesotans for Fair Lending, intends to bring the program to the rest of the state if they can.

And it looks like they may already be having some success. Durand mentioned that officials in Duluth and Mankato have expressed some interest in doing something similar.

The Battle Is Far From Over

While the cause seems to be picking up momentum in places across the country, payday lenders aren’t going to give up without a fight.

Even Nick Laid, the owner of Greenbacks in Moorhead, fought back vehemently against the changes.

He claimed that payday lenders are an emergency service like ambulances, and that people should compensate them like one. He also argued that payday loan borrowers are far too risky for other loan types, so the interest rates are fair.

Those arguments are pretty common in the rest of the country. Payday lenders seem to believe on some level that they are justified in their dealings, so they’re not going to go quietly.

And despite the states and cities that are cracking down on payday loans, small personal loan balances are only growing larger.

Studies show that the average American personal loan balance in 2020 was $5,538. But the average amount of personal loan debt per household $9,074, almost twice that.  

Even worse, that number is slightly higher than what it was in 2019 ($8,989), which means that the efforts to eliminate payday lending haven’t done much to reduce people’s loan balances. At least, not yet.

It looks like it’s going to be a long fight to get rid of predatory lending completely. Time will tell if it will even be possible.

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