Lending business v. Plain old usury: Notes from the Colorado payday hearing

For six hours Monday in the packed Old Supreme Court Chambers of the Capitol before the House judiciary committee, lawmakers and lenders and borrowers traded stories and opinions on the payday loan industry in Colorado and whether and how it should be regulated.

Flickr: Stallio
Flickr: Stallio

Borrowers sunk by the payday industry’s ballooning interest rates told tragic stories of their lives unraveling. They were supported in their testimony by more than a hundred Colorado community and religious organizations.

Payday lender employees testified that they feared losing their jobs should Denver Democratic Rep. Mark Ferrandino’s interest-rate capping legislation pass.

Lawmakers feared the law would restrict a credit source.

Business community representatives and trade organizations raised the specter of the rising unemployment numbers and revenue the state would lose should the payday loan industry pack up and ship out.

Maybe some of these businesses will leave Colorado, Ferrandino conceded. And maybe that’s OK. The predatory nature of the payday business-model warranted an industry contraction that has been too long in coming, he said.

Ferrandino’s bill would cap payday interest rates at 36 percent. They now stand at roughly 320 percent.

The proposal, which began the day as a ballot referendum but ended as a straight legislative bill, seeks to lift the exemption for the payday industry of the state’s usury laws, which cap most loans at 36 percent. That exemption was passed in 2000 by the General Assembly.

“All this bill tries to do is put those businesses back under the same restriction they were under prior to 2000– [back to] 36 percent interest rates,” Ferrandino said.

Rep. Bob Gardner, R-Colorado Springs, with the other Republicans on the committee, sympathized with the lenders. He said that although he has wrestled with the ethics of the high cost of the payday loans, he is swayed by business considerations.

“It seems at least from the stand point of payday lenders that this will be a significant reduction in their gross revenue and essentially puts them out of business.”

Gardner said his constituents include payday lenders and borrowers, who all see a need for the service.

Ferrandino said that, based on research from other states, new regulations would see a contraction in the business. He asked, though, whether the industry should be supported in its “current form.”

“What it is currently doing, when you see statistics and you see studies that show that someone who takes a payday loan is 26 percent more likely to file for bankruptcy, I would think that their product as it is offered right now does not provide credit to people, it provides debt.”

Ferrandino with the backing of the Colorado Attorney Generals Office, explained that many payday businesses skirt Colorado law, even as it exists today. He said the AG’s office found that 73 percent of the industry policies worked to get around mandated “cooling off” payment plans where borrowers with three payday loans are offered six payments at no interest. Lenders discourage borrowers from enrolling in the plans.

“You’ll never get a loan,” they say, Ferrandino told the hearing room. “We will not loan to you in the future.”

Laura Udis, first assistant attorney general in charge of the unit that administers the Colorado Credit Consumer Credit Code,  told the committee that the average payday borrower takes out eight loans over the course of a year and that half of all borrowers take out twelve or more loans from a single payday lender. They take out loans from other stores, she said, but the AG’s office doesn’t track that.

“State law allows one refinance,” Udis said. “Only one is allowed. However there is nothing that stops a borrower from coming in and getting cash from somewhere else, which happens with some frequency.” 

The Colorado Attorney General’s Office did not take a position on the bill.

Ron Ruckvam, president of Money Now and of the Colorado Financial Service Centers Association (COFISCA), said his family-owned five-store chain did not create deterrents for people to ask to enter the “cooling off” no-interest payment plans. He said the nature of short term relatively low-amount loans can not survive on typically low interest rates.

“The bill is trying to change our business model to 36 percent– which would amount to an unsustainable $1.36 [return] on a two-week $100 loan…. nobody survives that kind of a business model.”

Rockvam said the bill had one purpose: “To eliminate advance payment lending in Colorado.” He said he would have to close his stores should it pass.

“Use is on the rise. [Customers] are not running away from our stores. They are deciding that their alternatives are inferior to the service we provide.”

Rockvam said that more than 300,000 people used payday loan services last year.

Gardner asked what would stop Coloradans from using internet payday loan services unregulated by the state if payday lending ceased to be accessible here.

The attorney general’s representatives said that Colorado does have jurisdiction over anyone trying to lend in the state. Colorado prosecuted a Utah lender in 2005 and won a $2 million settlement.

The bill passed seven votes to four, a party-line vote.

“Partisan politics,” Ferrandino told the Colorado Independent. “One side is representing special interests, while the other is trying to give people access to real credit instead of debt. But I am pleased we were able to get it out of committee.”

Ruckvam said the industry would continue to fight. Ferrandino said he expected as much and that payday lobbyists were already turning out in force.

“Obviously, we are disappointed in the outcome,” Ruckvam told the Colorado Independent. “I think a lot of very good questions were raised and the committee seemed generally interested in getting to the facts. We will see if we can get enough of the facts out to the General Assembly to be victorious on the floor.”

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