Alaska Legislature votes to limit high interest rates and fees for payday loan lenders

On the 120th and last day of Alaska’s annual legislative session, the state House passed a bill that would curb high interest rates and fees for payday loans of $25,000 or less.

The Senate passed Senate Bill 39 in late April, and the House passed the bill May 21 by a vote of 24 to 16. The bill now is set to be transmitted to Gov. Mike Dunleavy’s desk.

If the bill becomes law, it would remove payday lenders from an exemption in state lending laws and cap interest rates and fees at an annual percentage rate, or APR, of 36% for loans of $25,000 or less.

Anchorage Democrats Sen. Forrest Dunbar and Rep. Ted Eischeid sponsored the legislation in the Senate and House.

“This bill closes a harmful special exemption that has allowed lenders to charge outrageous interest rates on small loans,” Dunbar said in a statement after the vote. “With this change, Alaskans will have the same consumer protections that apply to other loans, reducing the risk of debt traps and keeping more money in our communities.”

An estimated 15,000 Alaskans take out a payday loan each year, according to research by the nonprofit Alaska Public Interest Research Group. Payday loans are short-term, high-cost loans, often for small amounts that are meant to be paid back on the borrower’s next pay day. Interest rates can range from 194% to 521%, and advocates of the bill said it’s a consumer protection measure that could help borrowers avoid becoming trapped in a cycle of debt and repayment of more payday loans.

“Instead of fixing a problem, this exception to the Small Loans Act has been more like giving a thirsty person a glass of salt water,” Eischeid said on the House floor ahead of the vote. “It doesn’t help in the long term.”

Eischeid pointed to the Military Lending Act, which already established a cap at 36% total annual percentage rate for loans to military service personnel.

“Veterans, on the other hand, do not have similar protections and are targeted by payday lenders and are vulnerable to these excessive fees and interests,” Eischeid said. “We should provide safeguards in the marketplace, so Alaskans aren’t the victims. It’s time to remove the loophole to payday loans and protect Alaskan families from predatory lending practices.”

Rep. Jamie Allard, R-Eagle River, opposed the bill.

“This is government overreach. Individuals should be able to take loans as they wish, at whatever percentage rate. And frankly, there’s credit cards that have a higher interest rate than what we’re doing right now, today, and I don’t see that in this bill,” she said.

High interest loans can present dilemmas regarding governance and oversight. One day after the Legislature passed the bill, the Anchorage Daily News and ProPublica published an investigation spotlighting a tribal lending business, Minto Money, based in the small community of Minto outside Fairbanks. The story details how online lending at high interest rates is highly lucrative, but highlights ethical concerns, community divisions and questions around who benefits.

While the company does not lend to people in Alaska, the investigation found, there is an effort to attract other Alaska villages to the lending industry.

“Tribes in America are in demand as business partners because they can claim that, as sovereign entities, their operations are exempt from state interest rate caps,” the authors wrote. “Critics of such lending partnerships have called them ‘rent-a-tribe.’”

Dunbar said the legislation was developed before he became aware of the lender. He responded to the story’s findings in an email on Friday. “I applaud the investigative coverage of the ADN/ProPublica on a particular payday lender who appears to have engaged in the kind of practices that highlight why reform was necessary. Without clear limits, too many Alaskans have faced a lack of safe borrowing options and have often been left with only predatory choices.”

He said it’s notable that every registered payday lending company that operates in Alaska is based outside of the state, and the vast majority of these transactions are done online. The bill includes a provision to prevent companies from evading state interest-rate caps.

“I am glad that the bill included an anti-evasion clause and provisions to limit ‘rent-a-bank’ practices,” Dunbar said.

Once transmitted to Dunleavy, he has 20 days excluding Sundays to sign the bill, veto it or allow it to become law without his signature.