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Rough go for payday bill

Loan measure advances despite bipartisan trouble

By David Milstead, Rocky Mountain News (Contact)

Published March 1, 2008 at 12:05 a.m.

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Ron Rockvam, left, owner of Money Now at 8410 Wadsworth Blvd. in Arvada, watches as branch manager Susan Goodwin gives a receipt to customer Matt Howard on Friday.

Photo by George Kochaniec Jr. / The Rocky

Ron Rockvam, left, owner of Money Now at 8410 Wadsworth Blvd. in Arvada, watches as branch manager Susan Goodwin gives a receipt to customer Matt Howard on Friday.

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Emily Smart is the model of a responsible payday loan customer.

Smart, a retired teacher from the Adams County School District, says her once-a-month pension check doesn't provide the cash flow to care for her ill husband and the hefty co-pays the doctors charge.

Occasionally, she takes out a payday loan, agreeing to fees of $15 for every $100 she borrows. When the loan comes due, she nearly always pays it off.

"I don't like pulling them over," she says, referring to the practice of taking out a new loan to pay off the old.

While Smart may exemplify the wise use of payday loans, she's not among the industry's most profitable customers. Many payday borrowers come up short when the loans come due, so they take out another high-interest loan to pay off the first.

And the cycle continues.

The Colorado attorney general's office, which regulates payday lenders, estimates the "average" customer paid $573.06 in total finance charges to borrow $353.88 for about 51/2 months. A payday loan's average annual percentage rate, or APR, was 347.8 percent, the attorney general's office estimates.

Numbers like these have put payday lending in the bull's-eye of some consumer advocates, and the Colorado legislature has spent the past two years trying to clamp down on the industry.

A bill that passed the House and is headed to the Senate aims to set a maximum APR of 45 percent, the same interest rate cap that applies to other consumer-finance industries. It would set the minimum term of a payday loan at 30 days and also would bar payday lenders from "knowingly" issuing a loan to someone they know has another payday loan outstanding.

"This bill creates more reasonable regulation," says the sponsor, Rep. Mark Ferrandino, D-Denver. "It's a reasonable compromise allowing consumers to get one-time high-cost loans, without incenting the rollover debt that's happening."

Outnumbering McDonald's

The bill has run into bipartisan trouble, however, with numerous Democrats voting against it. As the payday lending industry engages in a significant lobbying effort, the bill's opponents suggest that setting the cap could kill the industry and leave payday customers with no other borrowing options.

"It effectively dictates that our business model deviate from what's been determined, industrywide, is necessary to operate our business," said Ron Rockvam, the head of a payday-lending trade group and the owner of five payday-lending stores from Fort Collins to Arvada called Money Now. "If this bill goes through, we need to move the discussion to what life in Colorado looks like without the payday lenders."

There was a time, not so long ago, when payday lenders made few loans in Colorado. There were roughly 100 payday licensees until 2000, when a new law called the Deferred Deposit Loan Act went into effect. Payday lenders were then exempt from the 45 percent cap on interest rates in the consumer-finance industry.

Over the next six years, the number of lenders topped 600, and the number of loans more than tripled. By 2006, borrowers took out 1.8 million loans totaling almost $633 million, according to the attorney general's office.

"In Colorado, there are more payday lenders than there are McDonald's - there are three for every McDonald's," said Rich Jones, director of policy and research for The Bell Policy Center, a think tank that advocates greater regulation of the industry.

The center is just one of a number of political, social and religious groups backing House Bill 1310, Ferrandino's effort. Jones said others involved are the Center for Policy Entrepreneurship, the Colorado Progressive Coalition, Metropolitan Organization for People, Mile High United Way, Colorado AARP, Colorado Women's Agenda, Lutheran Ministries, the Latin American Research and Service Agency and the Latina Initiative.

Critics of the industry - and advocates of the bill - target what they see as a cycle of dependency on expensive debt.

"At the end of the day we think that payday loans as currently structured are flawed products and should be fixed," Jones said. "They encourage repeat borrowing that traps people into long-term debt. We believe that HB 1310, by reducing the fees payday lenders can charge and extending the payment terms to 30 days, will make them better products."

Similar law in Oregon

Ferrandino's bill charts a course few states have taken. Roughly 10 states ban payday lending. Most, like Colorado, set a fee limit on the loans that translates into APRs in the triple digits. Few try to cast the payday loan fees in terms of an APR of roughly 30 percent to 40 percent.

An Oregon law that went into effect in July is similar to HB 1310, however. What has happened since gives credence to payday industry warnings about store closures.

Lisa Morawski, communications director for the Oregon Department of Consumer and Business Services, said the state likely peaked with 368 payday licensees at the end of 2005. On June 30, 2007, the day before the law took effect, there were 329 licensees. Six months later, there were 121.

"A third of the individual licensees are still around," said David Tatman, an administrator with the Oregon regulator. "There's still a market for making these short-term loans. We think this is making them work their bottom lines with a sharper pencil."

Not surprisingly, the payday-loan industry doesn't see it that way. It's been telling its employees and customers that HB 1310 will kill the industry, leaving its workers jobless and its customers with no other source of fast money.

Smart, the retired teacher, said she saw a big yellow sign on the front of her payday lender in Northglenn that said the bill would cause it to go out of business. She said she made the trip to the Capitol to testify against the bill because of it.

Payday lenders also are deputizing their employees. The Bell Policy Center provided an "employee phone script" obtained by the United Way from a woman who said she was an employee of a payday lender. Employees who phone their senators and follow the script tell them the 45 percent APR translates into "loans for $1.75," and "we have to make seven new loans to make up for every one loan that goes bad, before we make any money at all! My company will close down, and I will be out of a job, and I won't have benefits."

The issue of just how much a payday lender must charge to succeed is at the heart of the debate. Rockvam, embracing the math of the script, says cutting the APR to 45 percent is an 85 percent reduction in the industry's charges, from $15 per $100 to just $1.73. Among the members of his trade association, "I've yet to meet anyone who thinks they can do business on 13 cents a day."

What about ATM fees?

Industry data from the attorney general's office show high delinquency rates for payday loans in comparison with traditional lenders. In Colorado in 2006, lenders classified $89.9 million of the $632.9 million in payday loans as in default, a rate of 14.2 percent.

However, $56.9 million of the loans were later repaid, leaving $26.2 million, or 4.2 percent, charged off. (Lenders can still recover loans even after they're charged off, suggesting the loss numbers are even lower.)

That charge-off rate is "quite comparable" to the charge-off rates for credit cards and the unsecured portfolios of consumer-finance companies, said Laura Udis of the Colorado attorney general's office. Those lenders, she notes, "have lower APRs than the payday lenders."

The two sides also differ on what will happen if the industry shrinks or disappears, with each side pointing to a set of favorable academic studies. The payday industry cites work by a researcher affiliated with the Federal Reserve who found an increase in bad checks and bankruptcies following recent bans in North Carolina and Georgia. Opponents cite a study from the North Carolina banking commissioner that said former payday borrowers have instead turned to paying bills late, borrowing from family or friends, or using credit cards or savings.

While HB 1310 has progressed through the House and into the Senate, it hasn't been smooth sailing.

The bill originally called for a central database of borrowers to help prevent a payday lender from making a rollover loan to another company's customer. That provision was stripped out in the House Business Affairs & Labor Committee, which also raised the initial APR cap to 45 percent from 36 percent.

After testimony from both sides, the bill cleared the committee on a 6-5 vote. It then mustered a 33-30 vote in the full house. It awaits a committee assignment in the Senate.

Rep. Debbie Benefield, R-Arvada, sponsored a payday-lending bill last session that gives borrowers an option of rolling over their fourth consecutive payday loan into a no-interest, no-fee loan of no fewer than six payments. Benefield believes her bill, signed into law last year, should be given time to work.

She also objects to looking at a payday loan fee in terms of an annual interest rate.

"Nobody's talking about the $1 I'm charged at the ATM as an annual interest rate," she said.

"There are times in your life when your credit is maxed out, and you have no other option but to write a bad check, and you need cash flow for a period of time," she said. "This is the way to do that. These are absolutely a tool for some people in the short term."

Jean Torkelson contributed to this article. Finance Editor David Milstead can be reached at milstead@RockyMountainNews.com or 303-954-2648.

Lending bill

House Bill 1310 limits the effective annual interest rate on a deferred-deposit, or "payday" loan, to 45 percent. The effective annual rate on these loans in Colorado can be as high as 392 percent.

How loans work

Customers of a payday lender show a pay stub and other documents and can take out a loan of up to $500 for a fee of up to $15 per $100. The maximum fee is $75. The loan is typically due in two weeks.

By the numbers

$632 million is the value of the 1.8 million loans payday lenders made in 2006, according to the Colorado attorney general's office, which regulates the industry.

$573.06 is what the average customer paid in finance charges to borrow $353.88 for 51/2 months in 2007. The APR was an estimated 347.8 percent.

Comments

  • March 2, 2008

    12:32 a.m.

    Suggest removal

    fromthefrontline writes:

    So many time I read articles about payday loan companies charging $15 per $100 and sometime $18.

    At StarAdvance.com the everyday rate is $8.90 per $100.
    A new client first loan is only $7.12 per $100

    If newspapers published these low rates it would HELP bring down these high price rate.

  • March 3, 2008

    1:17 p.m.

    Suggest removal

    Diff writes:

    Why would anyone pay these rates?
    I can not imagine a situation that would make sense for anyone to need to use these types of loans and I have in years past been on some pretty hard times and gone weeks with "no cash" in my pocket, and at times when I had no credit card or other means to put money in my pocket until the next pay day.
    I think using these is a very poor decision on anyones part. period!
    But I also think that it is legalized loan-sharking, and needs some tougher and more limiting regulation. even the APR or 45% this new bill would bring is usery and outlandish.
    I would prefer to see this type of thing run out business, because they pray on the poorest and for the most part least educated in our society. who more often that not dig themself's into a bigger hole that is harder to get out of.
    This is a a fools game and I think the legislature needs in this case to protect people from them self and those who would take advantage of them.
    I think this is a case of once people are down - keeping them down and giving them a kick while they are down as well

  • March 3, 2008

    6:08 p.m.

    Suggest removal

    Grant writes:

    With the mortgage crisis going on, I don't even know why I am giving this article the time of day, but they are related, so here is my opinion. We need to stop blaming these lenders and start holding borrowers accountable for their actions. If I borrowed $100 from you, and was not able to pay it back, do I blame you for lending me the money? NO! I am held responsible for my irresponsible borrowing! These lenders are providing a great service that is up front and easy to use.
    The differences between a Toyota Avalon and a Lexus LS are slim to none, but the price difference is about 10 grand, why? Because you are paying a premium price for a premium product, (and the name). That is where payday loans stand. They are a premium product that is easily attainable, which is why they should be allowed to charge a premium price. If I go to a bank, I can't get a $100 loan, and I might get a better interest rate on a bigger loan, but it takes time and energy. No matter what you do, you are paying something (money or energy) for what you are getting. These lenders are getting the short end of the stick for trying to help.