United Front

The Legal Services Advocacy Project released a report in February 2010 that revealed the questionable practices of three payday lenders operating in Minnesota.

The Legal Services Advocacy Project released a report in February 2010 that revealed the questionable practices of three payday lenders operating in Minnesota that are inappropriately using an obscure banking statute to circumvent Minnesota’s Payday Lending Law and charge even higher fees than the Payday Lending Law permits.    The circumvention of laws designed to protect borrowers from predatory payday lending practices is not new. This latest evasion by Payday America, the Unloan Company and ACE Cash Express exploits a loophole that allows these lenders to extract unjust fees costing Minnesota families nearly $6 million to date.

In 1995, the Minnesota Legislature enacted the Payday Lending Law to govern payday lending. The three loophole lenders are masquerading as Industrial Loan and Thrifts, a type of financial institution whose original purpose was to provide homeownership opportunities.   Using the authority granted to Industrial Loan and Thrifts, these loophole lenders are able to charge what lenders using the Payday Loan Act are prohibited from charging.

These loophole lenders provide none of the financial services that the other 16 other licensed Industrial Loan and Thrifts provide. Conversely, the other Industrial Loan and Thrifts make not a single payday loan.  There is no justification whatsoever for legally allowing three payday lenders, under the cloak of the Industrial Loan and Thrift statute, to evade the Payday Lending Law. This subterfuge is making financial stability even more tenuous for desperate families experiencing job loss and other economic disruptions.

There are 28 licensed payday lenders, but only these three exploit the loophole.   These practices raise substantial questions about the propriety of using a financial institution designation that is completely unrelated to payday lending. It has created an unfair and unlevel playing field for the other 25 licensed payday lenders playing by the rules and lending under the Payday Lending Law.  Moreover, since 2003, when the loophole was first discovered and exploited, loophole lenders have made a total of more than 552,000 loophole loans (accounting for almost half of all loans made during that period).

For a copy of the report, click here LSAP Legal Loophole Report

Legislation was introduced in the 2010 legislative session (HF 3170, authored by Representative Jim Davnie, and SF 2837, authored by Senator Kevin Dahle) to close the loophole.  The bill passed the House Labor and Consumer Protection Division and the Commerce and Labor Committee, but failed to make first deadline.  No hearings were held in the Senate.

Written by Ron Elwood, Staff Attorney, Legal Services Advocacy Project

651-222-3749, ext. 109 or relwood@mnlsap.org