Colorado Bill May Signal Death Knell For Payday Lending in State, Official Says

Source: BNA - Bankruptcy Law Report
Date: May 20, 2010

Payday Loans:

DENVER-A bill (H.B. 1351) approved in the 2010 session of the Colorado General Assembly limiting the finance charge on deferred deposit loans to a maximum annual percentage of 45 percent will put the payday lending industry "at grave risk," an industry official told BNA May 14.

The Colorado House concurred with Senate amendments to the bill May 4. The Senate approved it April 30. Gov. Bill Ritter (D) touted it as one of the major consumer protection initiatives passed during the 2010 session and suggested he is going to sign it. It will take effect Aug. 11.

"It certainly puts the industry at grave risk," Jamie Fulmer in Spartanburg, S.C., director of public affairs for Advance America, the nation's largest provider of non-bank cash-advance products, told BNA. "It remains to be seen whether or not we can operate under the strict and punitive regulations they have created with this legislation."

Ends Practice

Most problematic for the industry is a provision amended into the bill in the Senate designed to end the practice of payday lending. The amendment, offered by Sen. Rollie Heath (D), would require loan terms to be a minimum of six months from the transaction date, Heath said.

"This compromise amendment is meant to prevent the harmful cycle of debt, while ensuring these loans are available for the people who need them the most," he said. "We need to ensure the loans continue to exist for the people who can't get credit any other way."

A payday loan is typically a small loan of up to $500 that is secured by the borrower's personal check. Many borrowers find it hard to pay back a loan by the next payday without rolling over the loan, thus incurring fees and high interest rates, according to bill sponsors.

"Thousands of Coloradans have already been forced into a terrible cycle of debt because of the current practices of predatory lenders," said Sen. Chris Romer (D), bill sponsor in the Senate. "We want to reform the industry so that it is honest and affordable and so Colorado's citizens are protected. It's not complicated; it's just fair."

Finance Charge Limit

In addition to limiting the finance charge to a maximum annual percentage rate of 45 percent, the bill provides that lenders may charge a finance charge of not more than $10 for each $100 loaned for the initial loan in a 12 month period, according to the Colorado Legislative Council.

Colorado law already limits payday loans to $500, and H.B. 1351 would keep that limit in place. Under state law, finance fees can be no more than 20 percent of the loan for the first $300, then an additional 7.5 percent on any amount that exceeds $300, up to $75.

The bill also would allow lenders to charge a $7.50 fee per $100 of the loan with a maximum of a $30 fee per month.

The loan can be rolled over only once. According to the Attorney General's Office, the average payday borrower in Colorado currently rolls over or takes out the same loan six times before paying off the original loan amount. In 2007, the average borrower paid $573 to take out a $354 loan, the attorney general's office said.

Fulmer told BNA the bill "makes payday lending an extremely complex product for the consumer who may have short-term financial needs." The bill "creates a whole host of problems for the consumer," he said, adding that many consumers will turn to the unregulated marketplace of loans.

More Expensive

"There is a whole group of companies on the Internet and off-shore who are willing to offer a payday loan that doesn't come under the Colorado law," he said. "These will be more expensive and will provide consumers without the protections of a regulated environment within the boundaries of a state market."

The bill also "potentially threatens the jobs of people we employ in Colorado." Advance America is "evaluating the legislation and trying to determine whether we can feasibly operate in Colorado. We operated on a thin profit margin there as it is. The last thing we want to do is put our employees out of work and leave consumers with one less credit option."