On May 18, Minnesota Governor Tim Walz signed into law the Commerce Omnibus Bill, which, among other things, amends Minnesota Statute §§ 47.60 and 47.601 to cap the annual percentage rates (APR) on consumer small loans and consumer short-term loans at a 50% all-in APR, and expressly provides for predominant economic interest and totality of the circumstance tests for true lender purposes.

The bill defines “consumer short-term loan” as a loan to a borrower which has a principal amount, or an advance on a credit limit, of $1,300 or less and requires a minimum payment of more than 25% of the principal balance or credit advance within 60 days. The bill defines “consumer small loan” as a consumer-purpose unsecured loan equal to or less than $350 that must be repaid in a single installment.

Following the amendment, a lender must engage in an ability to pay analysis if the all-in APR on a consumer small loan or consumer short-term loan exceeds 36%. The ability to pay analysis “must be based on the calculation of the borrower’s debt-to-income ratio for the loan period” that is supported by documents evidencing the borrower’s net income, major financial obligations, and basic living expenses.

The amendment also contains an anti-evasion provision providing that a lender must not attempt to elude these requirements by making, offering, assisting, or arranging for a loan with a greater rate than permitted by the amendment regardless of a physical location in Minnesota, making loans disguised as a personal property sale and leaseback transactions, or disguising loan proceeds as a cash rebate for an installment sale of goods or services.

The amendment also codifies a predominant economic interest test. That test provides that a person is a consumer small loan or consumer short-term lender if: (1) the person directly or indirectly holds, acquires, or maintains the predominant economic interest, risk, or reward in the loan or lending business, or (2) both markets/solicits, brokers/arranges, or facilitates the loan and holds the first right of refusal to acquire loans, receivables, or other interest in the loan.

A person is also a consumer small loan or consumer short-term lender if the totality of the circumstances show that the person is a lender and the transaction is “structured to evade” the amended requirements. The amendment sets forth example circumstances indicating when a person is the lender. Those circumstances include when a person:

  • indemnifies or protects a person not subject to section 47.60 from any risks of the loan;
  • predominantly designs, controls, or operates the lending activity;
  • holds the trademark or intellectual property rights in the brand, underwriting system, or other core aspects of a lending business; or
  • purports to act as an agent or service provider for a person not subject to 47.60 while acting directly as a lender in other states.

The amendment is effective January 1, 2024 and applies to loans originated on or after that date.