Minneapolis resident Sherry Shannon borrowed $140 from a payday lender to fund a repair on her car almost two years ago. Even though she tried to pay it off, the loan ballooned each month with interest and fees until it had more than doubled from the original amount.
"It was just a nightmare," Shannon said. "I didn't think I'd ever get out of this."
Shannon eventually received help from her church to pay off the debt, but consumer advocates say millions of borrowers across the country have found themselves in a similar situation.
That's spurred a nonprofit to launch a first-of-its-kind lending service that aims to help consumers stuck in a debt cycle at payday lending institutions. Exodus Lending started offering refinancing of payday loans this week.
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Payday lending is a short-term loan obtained against the borrower's future paycheck. Opponents of the payday loan industry say it preys on low-income people, saddling borrowers with high interest rates and fees. Industry officials argue that they offer a temporary service to those trying to make it to the next paycheck.
"There's always a fee at the front end when you take out the loan, but also a fee every time you roll it over" by taking out a new loan, said Adam Rao, director of Exodus Lending. "By the time they're able to pay off the loans, if they're able to get out of it, they've paid exorbitant amounts of money and fees as opposed to the amount of the original loan."
The Consumer Financial Protection Bureau estimates that 80 percent of payday loans are rolled over at least once and almost a quarter of borrowers roll them over more than six times. To prevent this cycle of ballooning fees and interest, Exodus Lending offers no-interest refinancing for payday loan debt, as well as long-term financial counseling.
Dozens of companies offer payday loans in Minnesota from brick-and-mortar storefronts as well as online. The Minnesota Department of Commerce estimates that the average payday loan in the state last year was $303. By the time the loan has been repaid along with all fees and interest, the average borrower had paid 228 percent of the original loan amount. The average yearly payday-loan borrower in Minnesota took out 10 loans a year.
Exodus Lending grew out of concern about a payday lender named ACE Cash Express that moved into a building near Holy Trinity Lutheran Church in Minneapolis about three years ago. Opponents of payday lenders, including at least a dozen people wearing clerical collars, rallied outside that business on Holy Thursday to announce the launch of Exodus Lending.
"We believe that financial institutions and banks should be able to make a profit from lending. We just think that these kind of interest rates are absolutely ridiculous, overt usury," said New Creation Church's Pastor Paul Slack, president of the faith-based group ISAIAH. "In fact, we think it's robbery, and we think it's sin, and we think it's high time that it's regulated and indeed this practice is stopped."
The Consumer Finance Protection Bureau found last year that ACE, a national company headquartered in Texas, had used illegal tactics against its clients. It required the firm to pay $5 million fines and $5 million in refunds.
The manager of ACE Cash Express referred all questions to the company's corporate office. Company officials did not respond to requests for comment.
But others in the industry argue that payday loans are often the most affordable of a set of options that includes credit cards or the possibility of overdrawing bank accounts.
"The vast majority of Americans use payday loans responsibly and make informed choices about their personal financial situation," said Amy Cantu, a spokesperson for Community Financial Services of America, which represents some large, licensed payday lenders. "They look to short-term credit to solve that temporary cash-flow problem until their next payday."
Cantu said her organization rejects the notion of a "debt cycle" caused by payday lending.
"What we've seen in those states without the payday loan option is that consumers turn to more risky products, more expensive products," Cantu said. "They have to basically turn to operators who operate in the shadows and provide this product illegally and outside the bounds of the law."
There are bad actors in the industry, Cantu said, but members of her organization stick to a set of best practices that includes the right to rescind a loan, truthful advertising and an extended payment plan that allows a loan to be repaid over a period of additional weeks without any additional cost.
The payday loan industry has come under increasing scrutiny in recent years. The Consumer Financial Protection Bureau announced late last month that it is exploring ways to end what the agency refers to as "payday debt traps." The agency could require payday lenders to assess a borrower's ability to repay before a loan is given out; require affordable repayment options; and limit the number of loans borrowers can take out each year.
On the state level, a bill that would have capped the number of payday loans taken out by borrowers was passed by both houses of the Legislature in 2014, with the vocal support of Gov. Mark Dayton. But it failed because the conference version wasn't passed by the end of session.
A bill introduced this year would limit all fees and interest to 30 percent of the original payday loan amount. That legislation hasn't made progress this session, but could proceed next year. A spokesperson for the Minnesota Department of Commerce said the agency and administration are interested in finding ways to combat the "debt cycle" that occurs when borrowers get into financial trouble.
Other faith-based groups across the country have started similar projects to refinance payday loan debt, but Exodus is the only one that combines that effort with financial counseling, said Rao, the director.
The project is starting small, hoping to refinance the payday loan debt of about 20 borrowers at first. But Rao hopes it will gain momentum in a climate where payday lenders are becoming increasingly scrutinized.
"Even if this is a small scale, this is a very meaningful and significant impact on people's lives, who are then going to become advocates on this issue and help encourage other people to take control of their financial future as well," Rao said.