Expressing concerns that loan sharks may become the new lenders for the poor, and saying they fear the loss of further jobs in a down economy, legislators Tuesday passed a bill to allow deferred deposit loan corporations to retain up-front fees. The bill passed 7-6 on a partisan-line vote and is now on its way to the House floor.
Community activists lost the first battle in their attempt to stop HB-1290, legislation they say will gut current law designed to protect desperate individuals from falling into a debt trap. Republicans on the Economic and Business Development Committee rebuffed activist arguments and said last year’s bill over-regulated the industry to the point of killing jobs.
“Loan sharks are out there and they would become an option if we were to over-regulate this industry as we did with last year’s bill. This bill is trying to somewhat correct that [legislation] passed last year,” Rep. David Balmer, R-Centennial, said.
Balmer said HB 1290 would help keep short-term lenders in business so that people are not pushed toward loan sharks who use unscrupulous measures to guarantee high returns. Detractors of the bill commented that those who engaged in loan sharking should be arrested, and said companies charging less for their services are already in the market to provide short-term credit to those in need.
The bill would amend last year’s legislation by allowing cash advance businesses to keep up-front fees, which currently must be refunded on a prorated basis.
Payday legislation passed last year allowed lenders to charge an origination fee of up to $75. The fee schedule set up in the legislation allows lenders to charge $20 for every $100 up to $300. After $300, it allows lenders to charge 7.5 percent on every hundred dollars up to $500. Borrowers who pay back the loan before thirty days receive a prorated refund of their origination fee. Borrowers who do not pay back the loan after 30 days begin to incur a $7.50 per hundred dollar maintenance fee per month that is capped at $30 over a possible 6-month term. In addition, they are charged a 45 percent interest rate.
“The only reason for this very simple bill,” Republican bill cosponsor Rep. Larry Liston, R-Colorado Springs, told committee members, “is to ensure complete clarity around one point, the origination fees are non-refundable.”
Activists including the AFL-CIO, Colorado Habitat for Humanity, AARP and other non-profits agreed Liston was correct, but said that the bill would mean undermining last year’s legislation.
“This will create legislation that will trap borrowers in the same old payday debt trap,” Corrine Fowler, of the Colorado Progressive Coalition said. “It completely undermines the intention of the bill, which was to create a product with lower cost and to end repetitive filing circles.”
Christine Murphy, executive director of the Colorado Center for Law and Policy, said the bill would lead to the absurd result of costing a borrower more for a two-week loan than had previously been the case before last year’s legislation.
“So you are stepping backwards from what HB-1351 was actually trying to do,” Murphy said.
Republicans and Democratic co-sponsor of the bill Jim Riesberg, Greeley, countered claims of high APRs by highlighting the relatively low dollar amounts involved with the loans.
Riesberg said those dollars don’t add up to much of a profit for lenders. He said “The operating costs to make a loan is $47.05, the cost of capitol is $3.70 and the bad debt cost is $18.70…which comes to a total cost of $69.45. So out of the $75 dollars they have for a loan origination fee there is a before tax profit of $5.55.”
That, of course, does not factor in the profit from on-going interest and monthly maintenance fees.
While sympathetic to the plight of borrowers, Republicans said it was the responsibility of the borrower to gauge the risks involved when borrowing money at a high interest rate.
Advocates said because current law creates an incentive for people to pay off their loans early and increases the payout to lenders as the loan matures, there is no longer an incentive for lenders to develop products to roll borrowers into new loans. Republicans, however, said that that model provides an incentive for borrowers to irresponsibly purchase loans because of the cheap access to credit.
Riesberg pointed to what he said was the clear language in last year’s law that indicated annual percentage rate (APR) refunds were separate from origination fees. However, Rich Jones, legislative policy director of the Bell Policy Center, after the vote said the language pointed to by Riesberg was controlled by the definitions of the bill. Last year’s bill defines APR with the statement:
“ANNUAL PERCENTAGE RATE MEANS AN ANNUAL PERCENTAGE RATE AS DETERMINED PURSUANT TO SECTION OF THE FEDERAL TRUTH IN LENDING ACT, 15 U.S.C. . 1601 ET SEQ. ALL FINANCE CHARGES SHALL BE INCLUDED IN THE CALCULATION OF THE ANNUAL PERCENTAGE RATE.
The Attorney General’s Office determined after considerable debate over the language of the bill that APR did include all finance charges and those were subject to being refunded at a prorated rate.
Jones said that was what both the coalition his group was part of and payday lenders had agreed upon.
Lenders said they had been under the impression that they would keep origination fees as part of the compromise.
Bill sponsors Liston and Riesberg said close to 140 stores had closed since the implementation of the new regulations, closures they said cost the state close to 500 jobs. Jones, however, said those numbers needed to be couched in history. He provided data from the Attorney General’s Office that showed an increasing trend in store closures since 2006.
The data showed an 18 percent reduction of stores in 2008-9, 6 percent reduction in 2009-10, and a 24 percent reduction in 2010-2011.
Speaking against the bill, Colorado Habitat for Humanity strongly urged members of the committee to vote the bill down.
“We believe that we offer a product that allows credit-less people to lift themselves out of poverty, and this product is something that keep people in poverty in direct opposition to what we stand for,” Kim Cooke, community relations manager with Colorado Habitat for Humanity said.