Companies are evading Minnesota’s interest rate caps. Lawmakers may leave the loophole open.

Minnesota lawmakers imposed strong limits on payday lenders last session, capping interest rates at 33% for loans between $350 and $1,000, and even lower for smaller loans — but a federal law allows banks based in other states to offer short-term loans with triple-digit interest rates.

A bill in the Legislature could close the loophole by opting Minnesota out of a provision in federal law that allows state-chartered, federally insured banks to offer loans at the interest rates allowed in their home state, rather than the state where the loan is issued.

The bill (HF3680/SF3932) was incorporated into the House’s commerce policy omnibus bill, but not the Senate’s. 

Sen. Matt Klein, DFL-Mendota Heights, is one of the authors of the bill and the chair of the Senate Commerce and Consumer Protection Committee. The provision was not included in the Senate omnibus bill because of some opposition within the DFL caucus, Klein said, declining to cite specific members. 

With a one-seat majority in the Senate, it takes only one DFL holdout to tank a bill. 

Minnesota Attorney General Keith Ellison supports the bill, writing in testimony that his office has received hundreds of complaints from consumers who took out loans through “rent-a-bank” schemes, in which an online loan company contracts with a bank in a state that allows high interest rates, and offers those loans through the internet in states with stricter consumer protections. 

The Minnesota Credit Union Network, the Center for Responsible Lending and Legal Aid endorsed the bill, among others. 

The bill faces opposition from online financial services providers, often referred to as “fintech” companies.

The Depository Institutions Deregulation and Monetary Control Act of 1980 was meant to put federally- and state-chartered banks on a level playing field by allowing both to operate in other states. The law allows states to opt out of certain provisions, and several states opted out of the law in the 1980s before opting back in years later. 

Iowa is the one state that never opted back in. Colorado’s Legislature voted last year to opt out — meaning it can clamp down on the out-of-state high interest loans. 

“State opt-outs of DIDMCA present an existential threat to a variety of our members’ business models,” wrote Danielle Fagre Arlowe, senior vice president of the American Financial Services Association in testimony to the Senate Commerce and Consumer Protection Committee. 

But for advocates of consumer protection, the move is a no-brainer. 

“What the provision in play right now would do … is say that Minnesotans are protected by our lending statutes, regardless of where their loan originates,” said Meghan Olsen Biebighauser, organizing director for Minnesotans for Fair Lending.

The commerce omnibus bills have not yet been heard on the floor of the House or Senate.