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POINT: HB 1310 aims to keep Coloradans out of 'trap'

By Rich Jones and Spiros Protopsaltis

Published February 23, 2008 at 12:05 a.m.

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A man walks past Cash Pay day Express on Stout Street in downtown Denver in 2006. House Bill 1310 would establish limits for pay day lenders.

Photo by Todd Heisler / The Rocky/2006

A man walks past Cash Pay day Express on Stout Street in downtown Denver in 2006. House Bill 1310 would establish limits for pay day lenders.

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Think lending money at 353 percent should be legal?

What about charging $500 to borrow $300?

This is not only legal in Colorado, it happens every day.

It's called payday lending, and it's sending Coloradans into a cycle of long-term debt, taking $76 million a year out of our economy.

Here's how it works:

Suppose the transmission in your car goes ker-thunk. You don't have the cash to get it fixed, but you need to get to work, so you go to a payday lender.

To borrow $300, you give them a postdated check for $360 to cover the loan plus a $60 fee. It's expensive and you only have two weeks to pay it back in full, but you figure you can scrimp and repay the loan on time.

You don't make it.

You can't make partial payments so one loan leads to another, then another and each time you pay another $60. You're trapped.

That's not the exception in the world of payday lending, it's the norm, according to Colorado's attorney general. The average payday customer pays $544 to borrow $343. Two out of three payday loans are "rollover" or refinance-type loans.

Payday lenders charge an average annual percentage rate of 353 percent, with some rates as high as 521 percent.

Those figures and other information are contained in our recent report that demonstrates how payday loans trap borrowers in an unanticipated and costly cycle of long-term debt they cannot easily escape. (Our report is available at thebell.org or c-pe.org.)

In 2000, the legislature created payday lending in Colorado by exempting the industry from the state's usury cap of 45 percent APR, which applies to banks, credit unions and other lending institutions.

For payday lenders, the exemption created a gold rush. The industry flooded into Colorado and set up shop, mostly in low-income neighborhoods. In just six years, their number grew to 661 — or three payday lenders for every McDonald's in Colorado.

The seemingly easy money lures many hard-working Coloradans into long-term debt. The attorney general says the average payday borrower takes out nine loans over 12 months as one loan leads to another.

If the predatory aspects of the loans were removed, Colorado families could save $76 million in excessive fees each year, according to the Center for Responsible Lending. That money would stay and be spent in Colorado instead of ending up in the coffers of out-of-state corporations.

Mainstream financial institutions, which are capped at an annual percentage rate of 45 percent, can't compete. Payday lenders have been given a special pass.

The legislature now has a chance to help Colorado's families avoid this financial pitfall and level the playing field for all lending institutions.

House Bill 1310 offers a reasonable, simple, cost-efficient and effective means of regulating the payday loan industry by capping the interest rate at the state usury rate of 45 percent, extending the payback period from two weeks to 30 days, allowing only one origination fee per year and limiting borrowers to one loan at a time. The bill is supported by a broad coalition of groups, including the Mile High United Way and Colorado AARP.

The U.S. Congress recently imposed a 36 percent cap for military borrowers after the Department of Defense determined payday loans caused morale problems that affected troop readiness.

Some states simply never allowed payday loans, others banned them, but a number of states have adopted interest-rate caps and other restrictions.

Oregon is one of those, and it provides a good model for Colorado's proposed reforms.

In Oregon, after restrictions were passed, some payday lenders left the state — for states like Colorado where they could make more money. But banks, credit unions and other lenders have stepped up, and borrowers in need of short-term loans now have better options.

Just as they did in Colorado before 2000.

Rich Jones is the director of policy and research at the Bell Policy Center. Spiros Protopsaltis is president of the Center for Policy Entrepreneurship.

Comments

  • February 23, 2008

    8:11 a.m.

    Suggest removal

    Art writes:

    Looks like the "trap" caught the writer. Is this an example of journalistic excellence? I think not.

  • February 23, 2008

    11:54 a.m.

    Suggest removal

    vudumom writes:

    They got a picture of a man walking past a Pay Day loan place.That's the best they could do.Sometimes if you try real hard you can get a whole story by looking at a picture.Maybe the RMN wants people to think for themselves.Could be a whole new way to do the news.

  • February 26, 2008

    7:03 a.m.

    Suggest removal

    VVVV writes:

    Stop trying to protect us from ourselves. Sometimes 353% interest is better than no money at all. It's also better than the old system of finding a loan shark and risking your legs or worse. People will try to get money one way or another. Better that it's by going into a well lit store than a dark alley.

  • February 26, 2008

    9:33 a.m.

    Suggest removal

    alcambell_9 writes:

    Any ommission of laws against this type of loans is an approval of the type of loan sharking that organized crime started and I would suggest an investigation along those lines be instituted at once. This is not something that should take a feasibility study and creating a commission to determined what can be done about it, It is a moral violation of what this country stands for at the least and just another example of the big corporations and special interests greed at the expense of the most vunerable segment of society. When are the idiots going to wake up to the fact that when harm is done to one, harm is done to all, even if you think yourself above all risk of that action. What goes around comes around and you might well be the next victim, unless you have the guts to defend others rights and wellbeing to insure it never comes around to you.

  • February 29, 2008

    3:02 p.m.

    Suggest removal

    gary writes:

    Wow, 76 mill out of our economy?? Where did it go?? I think it stayed right in our economy. If the RMN was really interested in stopping money from leaving our economy....they would be against illegal immigration. Illegall immigration takes billions out of our economy. Come on RMN do an article on the cashflow out of the US to Mexico by illegals. Let alone our losses for thier expenses here in the US.
    The RMN and City of Denver....haven for illegals..and letting billions leave our economy!!

    Nuff Said

  • March 5, 2008

    12:30 p.m.

    Suggest removal

    Lala writes:

    It is asinine to attach an APR to payday lending. There is NO APR. Payday lenders attach what is called a FEE to their loans. If you owe a payday lender $125 today, in 12 months you will still owe them $125. It does NOT increase as it would if there was an annual percentage rate attached to that. If you can create an APR out of payday lending then there should be APRs attached to ALL fees associated with anything. For example, your bank. Ever notice how they attach fees to everything? If you have an account with Wells Fargo, say you overdraw your account by 3$. You notice the mistake and move money in to cover the 3$ within 14 hours of overdrawing your account. Wells Fargo will charge you $34 for that mistake. Since that is a FEE, not unlike the FEE attached to payday loans, let's calculate the interest rate on that. For a 3$ loan, for 14 hours, Wells Fargo has charged an interest rate of $1,133%. Now, let's figure the APR for this 3$ loan: A loan from Wells Fargo, for 3$, for 14 hours has an annual percentage rate of OVER 708,000%. Yes... let's restrict payday lending. That's the brightest idea I have heard in years. Oh yes... want to know actual loan sharking and 'hidden' fees: mortgage brokers and back-end fees.

    Let's not get stuck on stupid people.