Michigan Legislature Expected To Reject High-Cost Payday Lender Bill
Mich. Atti. General Dana Nessel, guest writer
The harms of payday loans have been well documented, and the Michigan Legislature is now poised to provide these lenders with another tool that could have a detrimental financial impact on our state’s already vulnerable communities.
On May 27, the Michigan House of Representatives approved Bill 5097, authorizing a new long-term, high-cost “small” loan product by “deferred presentation service transaction providers,” better known as the name of payday lenders. The bill would allow payday lenders to provide loans of up to $2,500, with a monthly fee of 11% of the loan principal, which equates to an APR of about 132%.
This means that on a loan of $2,500 over one year, a borrower will end up paying back over $4,000. In short, HB 5097 would allow payday lenders to sell another high-cost loan product, with larger amounts and longer terms.
Payday loans are marketed as a quick, infrequent financial solution for unforeseen emergencies, but can easily become a long-term cycle of repeated loans and lingering debt.
Data from the federal Consumer Financial Protection Bureau (CFPB) shows that 70% of borrowers in Michigan take out a new payday loan the same day they repay one and 86% re-borrow within two weeks.
Payday lenders drain more than $103 million in fees from Michigan residents each year. Michigan’s stores are disproportionately located in low-income communities and communities of color, making them especially damaging to our most vulnerable communities.
The bill further encourages a continuous cycle of debt, by expressly allowing a consumer to use one of these “small” loans to pay off an existing payday loan and also by allowing borrowers to renew a loan after having made only 30% of the scheduled payments. Therefore, borrowers could be stuck in this debt trap indefinitely. Additionally, the legislation allows lenders to directly access customers’ bank accounts electronically, which can lead to a potential cascade of other negative financial consequences such as overdraft fees and defaults on other expenses.
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Widespread opposition to HB 5097 has been voiced by a broad coalition of public, private, civic, religious, financial, and other organizations familiar with the harmful effects of predatory lending on Michigan residents. A May 26, 2020 letter to the bill’s sponsor, Rep. Brandt Iden in opposition to HB 5097, is signed by more than 90 of these organizations, with 57 cards registering the opposition presented to the Legislative Assembly.
Despite (or perhaps in recognition of) the breadth of opposition to this new loan product, HB 5097 as approved by the House of Representatives includes a last-minute appropriation, which rules out any subsequent citizen vetoes by referendum if adopted.
While consumers should have the power to make their own choices, the Michigan Legislature should not allow another high-cost loan product with the same debt-perpetuating features as existing payday loans; in particular an improvement through larger loan amounts and longer payment terms. Michigan working families need access to safe and affordable options, not another high cost loan from payday lenders.
After passing the House with limited support, the bill is now before the Senate Regulatory Reform Committee awaiting a hearing. I encourage all members of the committee and the Senate as a whole to reject this proposal and put their constituents above the wishes of predatory lenders.
Dana Nessel is the Michigan State Attorney General.