As part of a series on poverty, MPR’s John Biewen reports that while the Minnesota legislature passed regulations in 1996 designed to control interest rates so pawn customers wouldn't have to pay ten or fifteen times the rates charged for credit card loans, some of the state's pawnshops are using a loophole in the law to charge more than 200%.
Advocates for the poor say one reason for the persistence of poverty is that low-income people often pay more for basic goods and services than middle-class people do, making poor people feel they're running in place. Economists say a growing number of low-income people who need small loans are turning to pawnshops instead of banks and credit cards.
This is part two of four-part series "The High Cost of Poverty"
Click links below for other parts of series:
part 1: https://archive.mpr.org/stories/1997/01/13/the-high-cost-of-poverty-fringe-banking-part-1
part 3: https://archive.mpr.org/stories/1997/01/14/the-high-cost-of-poverty-rent-to-owncosts-a-lot-part-3
part 4: https://archive.mpr.org/stories/1997/01/15/the-high-cost-of-poverty-low-income-housing-part-4
Awarded:
1997 SPJ Sigma Delta Chi Awards for excellence in journalism Award, Public Service in Radio Journalism category
1998 PRNDI Award of Journalistic Excellence, second place in Division A - Enterprise/Investigative category
Transcripts
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JOHN BIEWEN: For a growing number of people with low incomes and bad credit, pawnshops like this one in downtown Saint Paul are a substitute for a bank or credit card. A place to get ready money backed by collateral such as a VCR, tool set, or wedding ring. Pawn your personal property and you can have it back a month later for the amount of the loan plus interest and fees. If you don't come back, the pawn shop can put your property up for sale.
Last year, the Minnesota legislature passed a set of regulations designed to protect pawn shop customers. The Bill's senate sponsor, DFLer Leonard Price of Woodbury, says interest rates charged by pawn shops were a focal point of the legislative hearings.
LEONARD PRICE: And when people heard 300%, 270%, there was a lot of disdain toward that kind of charge. And again, it isn't that only poor people or low income people use pawnbrokers because, as I learned, there are lots of folks out there that use pawn as a way to finance particular things that they want or need, but nobody should have to pay that kind of interest rate.
JOHN BIEWEN: Price's bill, which went into effect last August, capped pawn interest rates at 3% a month or 36% annually plus a reasonable fee for storage and services. Price says the reasonable fee language was meant to give pawnbrokers some wiggle room. Now, pawnbrokers admit they're using that wiggle room to charge the same rates as they did before the law was passed.
SPEAKER 1: Oh, just trying to borrow?
SPEAKER 2: I'd like to get 50 anyway, if I could.
SPEAKER 1: 50, probably get you in the area of half that. Around $30 to get a loan out [INAUDIBLE].
SPEAKER 2: I'll do 30.
JOHN BIEWEN: A Minnesota Public Radio news editor pawned a television at a pawn shop in downtown Saint Paul.
SPEAKER 1: It's 12.5% every 15 days. So on 30, it's 12.5%. It's $3.75, and there's a $1 fee on pickup that we add, and that's for the St Paul Police Department to check out the item.
SPEAKER 2: OK.
JOHN BIEWEN: The $1 charge for the police check pushed the cost of the $30 loan to $4.75 for 15 days, a 380% annual interest rate. That figure is off the charts nationally. Of states that limit total pawn interest rates, the nation's highest is Georgia at 300%. The head of the Minnesota pawnbrokers association, Duluth pawnbroker David Gilberg, says it's no secret that the state's pawn shops have not really lowered their rates to 36% He says most charge interest and fees totaling an annual equivalent of 240% or 20% a month.
DAVID GILBERG: Yeah, it's entirely possible. Some shops are going up, up to 25%. I'm not aware of anyone right now who's encroaching into that 30% range. There may be. I'm just saying I'm not aware of it.
LEONARD PRICE: That's real interesting information because we did intend that it would be 3% per month, which I translate into 36% annual.
JOHN BIEWEN: Senator Price says pawnbrokers charging the equivalent of two or 300% interest are violating the intent of the legislature.
LEONARD PRICE: I think if there are consumers out there that are unhappy with that, and I suspect we'd hear from them with more experience, that they would file a complaint with their respective County attorney. And then I think we would have some discussions about that in the legal system.
JOHN BIEWEN: Price acknowledges that in a legal challenge, a judge or jury would have to decide whether pawnshop charges are violating the reasonable fee language in the law. Gilberg of the pawnbrokers association says he tells members to charge only fees that they can logically defend as necessary to cover their costs and make a decent profit. He says if pawnshops could only charge 36% interest, they couldn't survive.
DAVID GILBERG: 3% a month. Sounds like an awful lot of money when you're dealing on something such as an automobile loan or anything like that. But when you're talking loans as an average of under $50, at 3% only, you have to write an astronomical amount of loans to receive enough financial charges to make a living.
JOHN BIEWEN: There is some evidence to support that claim. John Caskey, an economist at Swarthmore and author of a book on pawnshops, says Northeastern states that limit total pawn interest rates to 36% do drive many shops out of business.
JOHN CASKEY: It's quite common in the Northeast to find very few pawn shops. The ones that exist are in large urban areas where they can do high volume. And often, they'll only, say, accept as collateral jewelry, high value items where they can make a profit while charging only 3% a month.
JOHN BIEWEN: So Caskey says New York, which limits pawn interest rates to 36%, has only about 70 shops statewide, half the number in Minnesota. The pawnbrokers association says the number of pawn shops in the state has grown from about 90 five years ago to 140 today. That mirrors growth in the industry nationwide. The number of pawn shops in the country has doubled in the past 10 years. Richard Fuller, a Minneapolis attorney who helped negotiate the state pawn regulations, says pawn shop customers are entitled to credit at reasonable rates just like everybody else. He says he wouldn't mind pushing some pawnshops out of business by lowering their interest rate cap.
RICHARD FULLER: There may not be a pawn shop on every corner. There will be enough pawn shops to fill the need.
JOHN BIEWEN: Senator Price says after gathering more information on the practice of Minnesota's pawn shops, he may consider rewriting the law if that's what it takes to bring pawn interest rates down. I'm John Biewen, Minnesota Public Radio news.