October 01, 2009 09:37 PM UTC

Bravo, Pols, for taking on payday lending

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• by: TheBell

(Our pleasure, Bell Policy Center–spammers, let’s dance. – promoted by Colorado Pols)

Thank you, ColoradoPols, for focusing your spotlight on payday lending. We at the Bell Policy Center believe that meaningful payday lending reform in Colorado is long overdue. Payday loans trap thousands of Coloradans in a cycle of debt that is difficult to escape. We need action now to protect our most vulnerable residents from this predatory product.  

For those unfamiliar with payday lending, these types of loans are cash advances for up to $500 that are secured solely with a post-dated check. The borrower pays a fee (under Colorado law, the maximum is $20 per $100 up to $300; $7.50 per $100 up to $500) and writes the lender a check for the amount of the loan plus the fee, due on the next payday, which is usually in 14 or 30 days.

If you do the math, the substantial fees and short repayment periods add up to hefty annual percentage rates (APR). A 14-day $500 loan with a $75 finance charge, for example, amounts to an APR of 391 percent. A $300 loan with a $60 finance charge that is repayable in 14 days amounts to a whopping 521% APR. According to the Colorado Attorney General, the average payday loan in Colorado is for $362 at a 318% APR.

You would think that some law would protect consumers from such ridiculous rates. In fact, there is. Colorado’s criminal usury statue prevents most lenders from charging rates higher than 45 percent. But in 2000, Colorado lawmakers carved out a special exemption for payday lenders, and since then they have flourished. Large, publicly traded payday chains flocked to Colorado, and there are now more than 600 payday lending stores here, more than McDonald’s and Starbucks combined.

The problem with payday loans is that they are very difficult to repay. If you bring home only $700 or so per pay period and need a quick $500, what are the odds that two weeks later you’ll have that $500 plus $75 more in fees? Not very high.  So most customers end up renewing their loans — for an additional fee. According to the attorney general’s office, 70 percent of payday loans in Colorado are rollover or refinance loans.  In 2007 (the most current data available), 33% of payday borrowers took out seven or more loans from a single location and approximately 11 percent had 13 or more loans.  And those figures don’t count loans taken from multiple payday stores.  

If you don’t believe that payday lenders want to trap borrowers in a cycle of debt, here’s what Dan Feehan, CEO of Cash America, had to say about the payday lending business plan: “The theory in the business is you’ve got to get that customer in, work to turn him into a repetitive customer, long-term customer, because that’s really where the profit is.”

Colorado lawmakers tried to address this problem in 2007 by requiring lenders to offer a “payment plan” option to borrowers after the fourth consecutive loan.  However, as in other states that have tried similar strategies, data seems to indicate that the measure has largely failed to stop the cycle of debt. Payday lenders have effectively discouraged customers from using payment plans or have cleverly avoided meeting the threshold requirements that cause the law to kick in. Only 1.2% of all payday loans in Colorado have been successfully repaid under a payment plan.

Payday lenders say that they serve clients who have no other credit alternatives and that the high rates are necessary given the high risk of loss. Both assertions are blatantly false.  Low-income Coloradans got by without payday loans before 2000 and have other options now. In states that have capped rates for payday loans, the product has not been missed. And far from being risky, lenders recover most of their money. The charge-off rate for losses is about 4.8 percent, comparable to other lending products.

Payday lenders target vulnerable populations. Of the more than 300,000 borrowers each year, the majority are women in their 20s or 30s.  The average borrower income is $28,000.  Most payday lending stores are located in low-income, minority communities.  Each year, borrowers pay about $80 million in excess fees for payday loans.  Isn’t it time we put that money back in the hands of the people who need it most?

For more information about payday lending or to join our efforts for reform, visit Coloradans for Payday Lending Reform.