AG Report Shows Payday Reforms Working, Saving Borrowers Millions

(But what effect have payday lending reforms had on blog spam? The people want to know! – promoted by ProgressiveCowgirl)

A recent report by the Colorado Attorney General’s Office on payday lending provides strong evidence that reforms enacted by the legislature in 2010 are working.

Data for the last five months of the year — the period the reforms were in effect — suggest borrowers are paying much lower effective interest rates and are largely avoiding the cycle of debt that trapped many of them under the previous rules. The result is that low-income borrowers as a whole are saving tens of millions of dollars a year — money that now will stay in the community and help families meet basic needs.

Data in the report clearly show that the 2010 reforms have reduced the cost and annual percentage rate (APR) for payday loans. It also shows that, on average, consumers are paying $61 to borrow $368 for 64 days. This results in an APR per loan of 95 percent. While still expensive, this is a vast improvement over the old loans, which had an average APR of 326 percent.

The report, issued last week, also shows that by blocking legislation last session that would have eliminated the requirement that finance charges be pro-rated when loans are paid off early, lawmakers saved borrowers an average of about $40 per loan, for an estimated total of $22.6 million in consumer savings.

The report is a compilation of data submitted by all the payday lenders in the state and covers the period Jan. 1-Dec. 31, 2010. Because reforms adopted during the 2010 legislative session took effect on August 11, 2010, the attorney general reports data both pre- and post-August 11.

The report shows that before the reforms went into effect, the average payday customer borrowed $369 for 18 days and paid $60 per loan, resulting in an average APR of 326 percent.

After August 11, the amount borrowed remained about the same, at $368, but other aspects changed dramatically. The attorney general reports that average contracted finance charges, including interest and maintenance fees, totaled $229, with an average term of 187 days. This results in a contracted average APR of 186 percent.

The contracted fees and APR are based on the minimum six-month loan term set by law.

However, borrowers are paying off the loans sooner than contracted — after 64 days, on average. Because all finance charges are refunded on a pro-rated basis and maintenance fees can be charged only every full month after the first month, the average actual cost per loan is $61, resulting in an average actual APR of 95 percent.

Under the previous law, consumers would have paid $60 every 18 days, for a total of $240, to borrow $368 for 64 days. The reforms cut these costs by 74 percent and provide borrowers with some breathing room to save enough money to pay off the loans.

If the finance charges were not refundable — a change the payday lenders and their legislative allies wanted to enact last session — the average cost to borrowers would total $100 and the average APR would be 157 percent.  

12 Community Comments, Facebook Comments

  1. ArapaGOP says:

    How many people have lost their jobs? A lot of payday lenders have closed just as predicted by Republicans. How many, Bell Policy Center? You should have a statistic for that.

    • Colorado Pols says:

      Look, we get that ANY job in this economy is nice to have, but let’s not pretend that Payday Lenders were propping up the economy and jobs market with all of their storefronts. You honestly want to make a case that the economy is worse off than it was a year ago because of Payday Lending reform?  

    • DavidThi808 says:

      Let’s legalize prostitution, drugs, and no limit gambling across the state. Imagine the number of jobs we can create.

    • gaf says:

      So apparently the unfortunate people who need to use payday lenders are supposed to provide job stimulus money to support payday lenders. Is that your argument?

      • Thank you for putting that out there.

        We know that Credit Unions can provide this service at a cheaper price than payday lenders.  And we know that many payday lenders haven’t gone out of business due to the regulations.

        We also know that someone desperate enough to need to use one of these services will do better putting that money back in to the economy on their own than they would if they filtered it through the payday lender, where a portion of it will be filtered off by yet another corporation feeding off the poor.

        No net job loss here.

    • TheBell says:

      ArapaGOP — The number of licensed payday lenders in Colorado, according to the attorney general:

      2006: 661

      2007: 618

      2008: 610

      2009: 505

      2010: 410

      As you can see, the number was declining even before the reforms took effect. Consolidation in the industry and the economic downturn are likely factors.  

      • RedGreen says:

        before the law took effect, or after? Couldn’t find that specified in the report, though there were lots of before-and-after comparisons.

        • TheBell says:

          AG’s annual report covers 2010, with data as of end of year. That means about seven months of customer/loan data before reforms, five after.

          We don’t have breakdown for number of stores pre- and post-reforms. It is, of course, likely that some stores closed because of reforms, but again, year-over-year trend has been downward.

          During reform debate, some businesses (those with check-cashing and other services) said they would survive; some that were strictly payday operations said they would close.

          We will be keeping track of data as it becomes available.

          • Diogenesdemar says:

            “neither.”

            That 410 is the “number of licensed locations reporting data for 2010.”

            So, if a particular lender went out of business (with a varying number of locations) during 2010, and chose not to file a report, then that lender’s locations and data are not inculded in the report.

            Likwise if a lender had say 60 locations that made loans during 2010, and then closed 30 of those locations at some point in time during the year (say post-August 2010), the numbers from that lender would include the data, and be counted as coming from, 60 locations.

            I have asked this numbers question of the AG’s office on previous ocassions and have never been able to get a number-certain answer that I felt comfortable with.  To the best of my knowledge the AG’s office does not report the number of locations open at any particular point in time.  And, that is unfortunately the way the most people (incorrectly) interpret their Annual Report information.  A comparison of the number of locations reporting data from year to year may be somewhat useful in determining the trend for these enterprises, but I think one is sadly mistaken if they think the Annual Report data tells the number of locations actually in operation at any particular point in time.  

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