March 03, 2010 08:08 PM UTC

Response to Camera's Editorial Against Payday Lending Reform

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• by: TheBell

(Really, really shouldn’t have spammed us, folks – promoted by Colorado Pols)

Last week, Pols took note of an editorial in the Daily Camera that came out against legislation aimed at reforming payday lending in Colorado. The bill asks lawmakers to allow voters to decide if payday lenders should be allowed to operate far above the state’s 36 percent usury limit. The Camera was good enough to print a response by Rich Jones of the Bell Policy Center on behalf of Coloradans for Payday Lending Reform.

In an editorial last week, the Camera came out against a plan to change payday lending laws in Colorado. It said the legislation is “terrible.”

We strongly disagree, and we don’t believe the facts support the Camera’s conclusion. The paper relied on information that is either incomplete, inaccurate or — most important — not specific to Colorado. It appears some of the data comes from an industry-funded study that has been widely criticized.

Here are the facts about payday lending in Colorado. The average payday borrower makes less than $30,000 per year, 60 percent of all loans are refinance loans and more than a quarter of all loans go to borrowers who took out 16 or more loans in the previous 12 months.

How do we know this?  It is based on data gathered and reported by the Colorado attorney general.  

The attorney general publishes two reports on payday lending. One is an annual report published each November based on information provided by payday lenders. It shows the number of loans issued, the total value of the loans, the percent of loans renewed or rolled over and the number of consumers who took out multiple loans.  

The Camera cited the most recent annual report, but these reports do not paint a complete picture. They do not account for the fact that payday borrowers often use multiple payday lenders.  Thus, they overstate the number of borrowers and understate the number of loans per borrower.  Here’s how.

If a borrower takes out six loans from payday lender A and four loans from payday lender B, the report counts him as two borrowers with ten loans, or an average of five loans. In reality, there is one borrower with 10 loans.

As a result, the Camera incorrectly concludes that borrowers are not using payday loans more than once a month.

There is another report, a more detailed report from the attorney general that the Camera did not use. It is a demographic report based on information gathered during regular compliance examinations. It provides a more accurate picture of borrowers and the loan volume.  

According to the most recent report, published Friday with data from 2001 through 2008, the median gross monthly income for all payday borrowers is $2,189, with 61 percent of all borrowers making less than $2,500 per month.

Moreover, this report shows that two-thirds of all payday borrowers were laborers, office workers or people who receive regular income through payments such as Social Security. Most borrowers are single, a majority of them women, and fewer than 25 percent worked in occupations that normally require a college education.  (The profile cited by the Camera — household income of $55,000 and college educated — appears to come from an industry-funded Georgetown University study that has been widely criticized.)

While some borrowers use payday loans occasionally, the lifeblood of the industry is the repeat borrower. Indeed, the payday business model does not work without them.

In 2008, 60 percent of all payday loans were either refinance loans or same-day-as-payoff loans. However you describe them, it is clear that most borrowers cannot pay their loans by the next payday.

That means that these products fail most of the time. If these were Toyotas — or even toasters — they would be recalled.

The facts from the attorney general make it clear that these loans hurt people. About half of all loans go to borrowers who had 12 or more in the previous year.

When the legislature opened the door to payday lenders in 2000, allowing them to operate outside the state’s 36 percent usury limit, these products were billed as a source of emergency cash. It is clear that it has not worked out that way.

A payment plan provision instituted by the legislature — to fix abuses that quickly became apparent — has not been effective. The payment plan approach has failed for 84 percent of the loans where it was required to be offered.

The Bell Policy Center surveyed credit counselors and social service organizations about the impact of payday loans on their clients. They were in near-unanimous agreement that the loans harmed their clients — and they all agreed that they would never recommend payday loans.

Perhaps the Camera was not aware of the fuller picture of payday lending in Colorado.  We can only hope that by digging a little deeper, the facts will change their mind.