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.

15 thoughts on “Bravo, Pols, for taking on payday lending”

ardy39 says:

October 1, 2009 at 10:28 pm

If thou lend money to any of my people that is poor by thee, thou shalt not be to him as an usurer, neither shalt thou lay upon him usury. Exodus 22:25

Just one of about a dozen times usury is mentioned in the KJV. Nearly always this practice is considered wrong.

Of course, in Deuteronomy 23:20 it’s not so wrong if the other person is a stranger. Maybe this is what the Colorado legislature had in mind?

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1. RedGreen says:
  
  October 1, 2009 at 10:34 pm
  
  we don’t get to chose which Biblical rules we think ought to govern public policy, do we? Sen. Renfroe got in a spot of trouble for a similar suggestion last year, didn’t he?
  
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  1. ardy39 says:
    
    October 1, 2009 at 11:55 pm
    
    That’s not what I meant at all. Not at all. (apologies to TS Eliot)
    
    I was attempting to point out the minefields of hypocrisy awaiting members of the “pro-business” & “religious-values” set.
    
    Anyone who is supportive of usurious interest rates had better not profess to be a Bible, Torah, or Quran devotee.
    
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PERA hopeful says:

October 2, 2009 at 1:36 am

I had a family member who got stuck in the payday loan revolving door. She was in so deep to the payday lenders that she fell behind on her rent. Her landlady evicted her and garnished her wages. She wound up declaring bankruptcy because she really didn’t have an alternative.

Now, I admit walking through the payday lender’s door was her choice, and it was a bad one. But once she got in, she could never get out and it was one short step from that to homelessness and bankruptcy.

And that lender didn’t make much off her! But that’s their business model … prey on people who are one short misstep from bankruptcy court. Who else would use them?

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davebarnes says:

October 2, 2009 at 6:01 am

make poor choices.

Why should we prevent them from making choices?

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1. MADCO says:
  
  October 2, 2009 at 6:22 am
  
  I choose to shoot heroin- why should you care?
  
  I choose to prostitute my body- why should you care?
  
  I choose to drive on bald tires- why should you care?
  
  I choose to store gasoline in my garage – why should you care?
  
  My neighbor chooses to break into my home and steal my stuff- why should you care?
  
  Loans should be that – loans. And they should only be made when two things are true. They are mutually beneficial to the borrower and lender and there is a reasonable expectation they will be repaid. Otherwise- it is robbery, aka theft.
  
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2. sufimarie says:
  
  October 2, 2009 at 7:30 am
  
  Because OBVIOUSLY people have so many choices when they go to payday lenders.
  
  That’s some mighty fine spin. <–(and that’s sarcasm, get it?)
  
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3. ardy39 says:
  
  October 2, 2009 at 8:01 am
  
  make intellectually poor arguments.
  
  Also, the market doesn’t work unless people have information with which to make “choices.”
  
  It is in the interest of the payday loanER to NOT provide adequate information to the loanEE about the consequences of this “choice.”
  
  Thus, it is in the interest of all of us to put some restrictions on some types of transactions (err, “choices”), especially when there is imbalance in the information available to the parties to the transaction.
  
  If some choose to drive drunk, I expect that you, davebarnes, would not interfere or try to prevent them from making that “choice.”
  
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4. Pam Bennett says:
  
  October 2, 2009 at 8:24 am
  
  What an ignorant statement. Are we supposed to attack with righteous indignation? Are we supposed to provide evidence to support your statement that has no support evidence? Are we to understand that “rich” people are that way because they are of superior intellect?
  
  Are we to believe you are a maker of excellent choices? Please provide the many examples you possess.
  
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5. redstateblues says:
  
  October 2, 2009 at 8:39 am
  
  Should we punish the weak and desperate, or those who pray on them?
  
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  1. Car 31 says:
    
    October 2, 2009 at 6:48 pm
    
    Punish the weak and meek, of course. They’re the ones inheriting the earth so a) why not screw the earth up for them first, and b) why not screw the inheritors before they collect the inheritance!
    
    Jeez, why do y’all need to make this soooo complicated all the time!
    
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    1. RedGreen says:
      
      October 2, 2009 at 8:10 pm
      
      And you’re right, it’s not complicated. If we can’t punish the weak, we’d have to punish the strong. And they might fight back. Don’t want that.
      
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  2. ardy39 says:
    
    October 2, 2009 at 8:17 pm
    
    it’s ‘prey’ not ‘pray.’
    
    (Although both are pretty nasty things to do to people without their permission.)
    
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    1. redstateblues says:
      
      October 2, 2009 at 8:27 pm
      
      Thanks. Spell check in Mozilla needs a word usage feature.
      
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6. WWWiggles says:
  
  October 2, 2009 at 9:18 am
  
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