Testimony was heard Wednesday on proposed legislation to cap the rates that payday lenders in Michigan can charge, designed to prevent what was called “a debt trap by design.”
Two bills were before the Michigan Senate’s Finance, Insurance and Consumer Protection Committee, Senate Bill 632, sponsored by state Sen. Sarah Anthony (D-Lansing), and House Bill 4343, sponsored by Rep. Jennifer Conlin (D-Ann Arbor).
Anthony’s bill would limit to 36% the annual percentage rate (APR) that payday loan providers could charge customers instead of the current graduated rate that she testified can equate to 370%.
“While this is not always the case, data shows that people often take out one payday loan only to reborrow again when the loan is due,” she said. “Statistics from the Consumer Financial Protection Bureau (CFPB) shows that 70% of Michigan payday borrowers reborrow the same day as the previous loan is repaid. And payday lending companies make 75% of their revenue off the backs of hardworking Michigan families who get caught up in 10 or more loans per year.”
Currently, the Deferred Presentment Service Transactions Act allows licensed payday loan providers to enter one payday loan transaction of up to $600 with a customer, with a service fee for each transaction. While the fees are capped, the interest rates are not, which Anthony said puts some borrowers in a debt bind that is hard to get out from under.
“The last thing these families need, especially when they’re already struggling to afford food or daily essentials, is to be trapped in a high cost debt cycle that nearly is impossible to escape,” she said. “This is why it’s important that we cap the interest rate on payday loans at an APR rate of 36%, aligning Michigan with 20 other states and Washington, D.C.”
Someone who has personal experience in that debt cycle is Monica Burks, who serves as the policy counsel for the Center for Responsible Lending (CRL), a nonpartisan, nonprofit research organization that bills itself as “working to promote financial fairness and economic opportunity for all, end predatory lending, and close the racial wealth gap.”
Burks told committee members her own story of turning to a payday lender to help pay for an unexpected expense and finding herself having to keep extending the loan, all the while incurring more expenses.
“I was a full-time college student at Washtenaw Community College when I took out one of these loans to cover a rental expense — not realizing that I would be trapped in that cycle for the course of over nine months, every two weeks having to take out these loans and repay them and not realizing it was getting harder to cover simple expenses like gas and food because of the high fees that I was paying,” she said. “They make no assessment of whether the loan is affordable for the borrower and they can seize money directly from borrowers’ bank accounts. This toxic combination of loan terms is a debt trap by design. As a matter of fact, the debt trap is the core of the business model.”
Burks said when she was finally able to pay off the loan, the employees of the payday lender congratulated her as they told her it wasn’t often they saw someone do that.
Another issue discussed Wednesday was the prevalence of payday lenders in communities that can least afford to pay off these loans in a timely manner and avoid incurring steepening debt.
“I represent parts of Ingham County, the city of Lansing, and all of Eaton County, which includes both rural and urban areas,” she said. “This industry targets our most vulnerable communities, low-income communities, rural communities and people of color. Data shows that there are 5.6 payday lending stores per 100,000 people in Michigan. In Black communities, that figure is 25% higher. In Latino communities, that figure is 18% higher. I challenge you to go to many of our communities, even like very rural communities, you know you’re going to see a gas station, probably a McDonald’s and a payday lender.”
Anthony cited a study from CRL that found rural census tracts in Michigan have a payday store concentration of 7.1 stores per 100,000 people, while census tracts below 80% of the state’s median household income have 9.1 stores per 100,000 people.
“You cannot convince me that they’re not targeting our most marginal groups of people in Michigan,” she said. “The data is staggering, but it has ignited local and state leaders to advocate for effective solutions.”
Michigan’s Black Leadership Advisory Council (BLAC) points to data from the Consumer Financial Protection Bureau (CFPB) that indicates 70% of payday loans in Michigan are taken out on the day a previous loan is paid back while 86%of payday loans in Michigan are taken out within two weeks of a previous loan’s payoff.
While each payday lender is limited to a single loan per customer, they must also enter each loan into a statewide database to ensure that individuals don’t exceed two loans at any one time from different lenders.
Other groups testifying in favor of the legislation were the Community Economic Development Association of Michigan (CEDAM), Project GREEN (Grassroots Economic Empowerment Network), Michigan Poverty Law Program and the Michigan Catholic Conference (MCC).
CEDAM’s policy director, Jessica AcMoody, noted for the committee that over two-thirds of Michigan’s payday loan stores are owned by out-of-state companies.
“Meaning millions of dollars from Michigan get drained from both our communities and our state. Our members working directly in the communities see this impact up close with these predatory loans causing overdraft fees, bounced check fees, closed bank accounts, and even bankruptcy,” she said.
MCC’s Tom Hickson, the group’s vice president for public policy, said that current law already caps loan rates at 36% to active military service members to protect them from getting into a vulnerable high-debt situation.
“If the federal government and numerous other states have seen fit to protect borrowers with the rate cap, Michigan should do the same for our residents here,” he said.
State Sen. Lana Theis (R-Brighton) asked Hickson about what best alternatives people in need of cash for an emergency car repair had if payday loans were not available. Hickson said that increasingly banks including Fifth Third, Huntington or U.S. Bank have offered what he called “old-school signature loans.” He added that different charitable organizations have also stepped up to provide emergency cash assistance in situations for which people currently turn to payday loan companies.
Speaking in opposition to the bill was Julie Townsend, vice president of government affairs for Purpose Financial, the parent company of Advance America, which operates 77 payday loan locations in Michigan. Townsend said a 36% APR cap on a two week loan would only allow for a fee of $1.38 per $100 loan.
“We can’t offer a loan at that fee,” she said. “It raises some concerns about where do people access credit if it’s not available to them from a licensed regulated lender in their state?”
Townsend added that in nine states that have established a cap on payday loans, there were no licensed lenders offering loans in those states any longer. She also referenced a 2023 Illinois academic study which she said found that after that state imposed a 36% APR cap, over 40% of those former borrowers said they paid bills late and incurred additional fees, 30% said they skipped out or cut back on everyday expenses and about 10% had experienced a utility disconnection.
However, a critique of that study by Georgetown University Law School Professor Adam J. Levitin found that it “suffers from serious data and methodological problems such that it does not tell us anything meaningful about the wisdom” of Illinois’ rate cap.
The committee’s chair, state Sen. Mary Cavanaugh (D-Redford Twp.), said she had personal experience with payday loans, telling the Michigan Advance that while working for AmeriCorps, she received about $400 every two weeks while also trying to attend school and took out a loan to pay for gas so she could commute between school and her AmeriCorps job.
“And I found myself having to take out loan after another loan based on those rates that were charged, and it took me a couple of months, but I was able to get out of it. But it also taught me that it’s something that very easily can catch people off guard, especially if you’re not prepared for those kinds of results,” she said.
Cavanaugh said while she understands the need for quick cash, she also understands the conversation about what alternatives are there in those situations.
“Where are some people going to have those kinds of opportunities to get short term loans at a very low safe APR?” she said.
For that reason, Cavanaugh said she bundled Anthony’s bill, SB 632, with Conlin’s bill, HB 4343, which would require the director of the Department of Insurance and Financial Services (DIFS) to submit, each year for seven years, a report to the legislature on payday loans in Michigan.
“That’s exactly why I kind of wanted to put them together because I do think that there is data out in other states, as well as in Michigan, that shows the harmful effects on minority black and brown low-income communities, that they can be done in tandem rather than one before the other and continue to prolong and get people in a negative cycle of living,” she said.
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