Back in 2000, the Colorado legislature gave a valuable gift to an industry that specializes in short-term loans.
Lawmakers exempted so-called payday lenders from state laws capping interest rates at 45 percent. Payday lending operations exploded in Colorado, and today they charge customers, primarily the working poor, annual interest rates of about 350 percent.
A new bill seeks to close that loophole and subject payday lenders to a 36 percent annual rate cap, with a provision for a reasonable loan origination fee. We support the measure.
Statistics collected by the Colorado attorney general’s office show how payday lenders are sucking borrowers into a cycle of debt that is difficult to escape without significant financial penalty.
It’s instructive to look at how the typical payday loan works in Colorado. A borrower walks into one of the hundreds of storefronts and asks for a loan of up to $500.
It’s an easy process and a borrower needs only a checking account and proof of employment, such as a pay stub. On a $300 loan, the borrower agrees to a $60 finance fee and writes the lender a post-dated check for $360. It will be cashed in two weeks. If the borrower cannot repay the $360 in two weeks, it can be rolled over for another $60. While state law prevents rolling over more than once, there’s nothing preventing borrowers from taking “refinance type” loans — getting a new loan shortly after closing the old one — and paying another $60.
Colorado Attorney General John Suthers found the average payday borrower in Colorado took out nine loans in 2006, an indication that borrowers are using the system for longer-term financing.
By the time the loan is repaid, the average Colorado customer who had borrowed $343 had to pay $544 in fees. The average annual interest rate was 353 percent.
Industry representatives will tell you it’s misleading to look at annual percentages, suggesting that fees are a better way of getting a handle on their charges since their loans are short-term, not annual. They also contend they’re filling an unmet consumer need and if customers agree to the terms, what’s the problem?
The problem is that the industry has an exemption to laws regulating interest rates and has used it to structure loans that are easy to get into, but difficult to get out of without paying hefty fees.
Under a bill proposed by Rep. Mark Ferrandino, D-Denver, lenders could charge a maximum finance fee of $30 a year, plus interest of up to 36 percent a year. The measure also would prohibit a lender from loaning to a customer who has an outstanding payday loan.
Payday lenders say they will go out of business if the reform act passes, and low-income people will have nowhere to turn when they need a few hundred dollars in an emergency.
We’re not convinced. Somehow, people were able to meet their short-term credit needs before the explosion of payday lenders. They borrowed from friends or family, their credit union, or used credit cards.
While payday lending won’t be nearly as lucrative if this bill passes, many payday lenders have other lines of business they can rely on, such as check cashing, tax preparation and tax refund lending.
Other states, as well as the U.S. Department of Defense, are scrutinizing the industry and taking steps to curb these lending practices.
We’re glad to see such an effort in Colorado and hope the measure will promote the development of more reasonable credit options.
