Michigan Lending Facts (www.michiganlendingfacts.com) was created to provide accurate information, research and data on lending issues impacting the State of Michigan.
We’ve been made aware of a co-sponsorship memo being shared on the topic of payday lending. Please take note: The legislation does not do what it says it will do. If the legislation were to become law, tens of thousands of Michiganders would be harmed and left with few options to improve their situation.
The memo’s author claims “this legislation increases consumer protection for the payday lending industry.” An admirable goal and one the state-regulated industry embraces sound consumer protections, too.
So Michigan Lending Facts (MLF) took a look at the provisions included in the legislation to assess if the goal is attainable.
Here are our findings…
| Provision | Issue Overview | Assessment |
| 36% APR Cap | It is well known that a 36% APR cap will eliminate state-regulated entities currently licensed in the state. This cap only impacts the supply of credit. Eliminating state-regulated products, online lending activity will increase significantly due to this drastic market disruption and the consumers’ needs will be met largely by unregulated lenders. | This provision decreases consumer protections and incentivizes unregulated entities to replace state-regulated entities. |
| Ability-to-Repay | Arbitrarily applying the same underwriting logic for 30-year home mortgages to two-week loans is not using logic at all. This is an arbitrary guess in the dark without any industry input. | MLF will provide further analysis on the impact of a 41% debt-to-income ratio ceiling. We do not believe this underwriting standard is better than the current standard used by the industry. There is no evidence that this provision increases consumer protection. |
| Cycle of Debt | The mere fact that a consumer obtains a second loan is not evidence that they are in a cycle of debt. State law provides multiple off-ramps in the event the consumer is in distress with extended payments plans and extended repayment options. There is no data to support this claim. | There is no evidence that the off-ramps provided in the legislation are better than the current off-ramps available today. Once we see language, we will analyze if there is an increase in consumer protections, but we doubt it. There is no evidence that this provision increases consumer protection. |
| $513,000,000 removed from Michigan over the last 5 years | There is no data provided to support this claim and it is not factual. Presumably the $513M refers to fees paid to licensees over the last 5 years. This figure represents Gross Revenue and if accurate, equals 13% of the amount advanced ($3.946B) to Michiganders who turn to regulated credit for short periods of time. It fails to consider the fact that 100% of Gross Revenue minus ROI remains in Michigan. A modest 10% return means $461M actually remains in Michigan. | There is no provision to increase consumer protections. And there is no data to support this economic impact. MLF strongly urges caution to readers as the data presented is grossly misleading. |
| Author’s Conclusion | “We need to increase consumer protection and oversight of payday lending institutions and help allow our constituents to exit their debt cycle and return to spending their disposable income stimulating our local economy.” | The industry supports strong consumer protection and a comprehensive state regulatory framework. In addition to existing regulation under DIFS, the industry also is regulated by the federal Bureau of Consumer Financial Protection.
No evidence has been provided to show a debt cycle and no provision has been provided that would better than the current off-ramps in law.
There is no evidence to support that this bill increases consumer protections.
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The true intent of this bill is to impose 36% APR cap to eliminate state-regulated entities. This only affects state-regulated supply. Nothing else. Consumers in financial distress, under-served by banks and credit unions, will find other options and MLF will provide additional information in the coming days. But know this… consumers in financial distress will spend more for credit with fewer consumer protections.
This is a bad bill for Michigan, the bill does not increase consumer protections, and Michigan Lending Facts urges you to stay away from this bill because this bill is not straight with the facts.
Here are some additional facts to consider when reading the memo:
On a 36% APR Cap
- In each example used by the author, the state-regulated entities have departed the markets. Enlisted military personnel do not obtain payday loans and there are no remaining state-regulated lending in South Dakota, Montana, and the District of Columbia.
- This provision will eliminate over 500 storefronts, every job within them, and every contract with businesses throughout the state that serve these companies and the customers.
- Customers will no longer have regulated credit – credit they used largely without incident since 2005. This is not a solution and creates bigger problems for thousands of people.
On the Ability to Repay
- All lenders big and small have an internal process for underwriting loans and assessing a customer ability to repay. It’s a requirement of lending under federal law. It is naïve to think that lenders do not make that assessment.
- The current law is rigid with consumer protections and processes that result in very few problems. MLF will provide an analysis as to how this would be implemented and what impact it would have if made law. MLF knows the industry supports responsible standards and more information will be provided on this topic. But there is no evidence this increases consumer protections.
On the Cycle of Debt
- Current consumer protections provide consumers with multiple off-ramps.
- The statement that a subsequent loan obtained following a previous loan results in a cycle of debt is inaccurate. Here is just one example why:
○ A consumer may for two months in a row spend $15 to obtain $100 to cover a bounced check that would cost $25-35 to the financial institution plus $25 in fees to the merchant or utility company. The same consumer may spend $15 to cover the minimum monthly payment to his credit card company. The credit card company charges $35 for a late or missed payment. It appears the consumer is saving money in both these situations that the author sees as a cycle of debt.
- Regardless, the state law provides two off-ramps: an extended payment plan and an extended repayment term following an 8th loan in a 12-month span.
On the $513,000,000
- There is no accuracy to the statement that “Payday lenders have removed over $513 million from Michigan’s economy over the past five years.”
- Presumably the author means to inform the reader that the authorized finance charges equal $513 million over the last five years. These fees were collected on $3.948 Billionthat Michiganders advanced to address their individual financial situations.
- The industry is significant to the state and the state needs to address policy issues with facts, not inaccurate statements. The $513 million is not net profit. It is gross revenue.
o It is from this revenue that the industry pays the wages and benefits for their workers who live in the state.
o It is from this revenue that the landlords receive their rent and the utility bills are paid.
o And it is from this revenue that thousands of small businesses that provide goods and services for the industry are paid. Many of the same small businesses compete for the rest of $513 million from the industry and its employees AND the $3.946 billion that is advanced each year to consumers who live in Michigan.
The Bottom Line
This bill seeks to eliminate a state-regulated supply of unsecured credit. It only impacts the state-regulated supply. It doesn’t address demand. It also doesn’t address the fact that payday loan consumers are checking account holders at a bank or a member of a credit union and those traditional financial institutions are not serving the demand. So they turn to the unregulated world of the Internet where online lending is exploiting the markets because state legislatures restrict the activities of the regulated lenders leaving monopoly-like environments for those outside of the regulation. This is a bad bill for Michigan and provides no increase in consumer protections.