HB 1290 – Concerning the nonrefundability of an origination fee for a deferred deposit loan
Rich Jones, Director of Policy and Research
The Bell Policy Center
March 28, 2011
Thank you for the opportunity to speak to you today. I am Rich Jones, the director of policy and research with the Bell Policy Center. The Bell is a non-partisan, non-profit research and advocacy organization dedicated to making Colorado a state of opportunity for all. We have been working for more than four years to reform payday lending in Colorado to ensure that payday loans are a source of credit for low-income borrowers and not a debt trap.
The Bell Policy Center opposes HB11-1290. It would significantly increase the costs and interest rates on those low-income borrowers who pay their loans off early. It also provides a financial incentive for payday lenders to get borrowers to pay off loans early and issue them a new loan shortly thereafter. As a result it weakens the six month minimum loan term that was at the heart of last year's reform.
Reform of payday loans was a major achievement of the 2010 legislative session. HB10-1351 set the minimum term of all payday loans at six months to give borrowers an opportunity to pay them off without endless rollovers. It also prohibited prepayment penalties. The fees paid by borrowers depends on how long it takes them to repay the loan. If they pay a loan off in one month, they only pay one month's worth of interest and fees.
So far, many borrowers indicate that the loans are more affordable and they are able to repay them on time. The new law seems to have reduced the cycle of debt where borrowers rolled over their loans or took out new ones every two weeks at exorbitant costs.
However, the proposed change to make the origination fee non-refundable strikes at the heart of what makes last year's reform successful- the six month minimum term and no prepayment penalty. Under current law, lenders earn no more money if borrowers pay off a loan early and subsequently take out a new loan then if the borrower holds the first loan to term. For example, lenders earn roughly the same amount in fees and interest if a borrower pays a loan off in 90 days or takes out three loans and repays each of them after 30 days. These changes help to end the churning of the loans and the cycle of debt found under the old two week payday loan product.
As tables 1 and 2 below show, the proposed change would significantly increase the costs and Annual Percentage Rate (APR) on loans for borrowers who pay them off early and rewards those payday lenders who can find ways to churn the accounts.
(See pdf for tables)
The multi-state payday lenders did not leave Colorado and most local lenders remain in business. In fact, the CEO of EZ Pawn, a publicly traded payday lender with 40 stores in Colorado when asked about the law passed last year told investors: "We're about two and a half months into that product and we are frankly happy, very happy with what is going on there. Our loan balances are where we expected them to be and our bad debt is actually slightly better than where we expected it to be."
Clearly the proposed change is NOT JUST a technical clean up but an attack on the very policies adopted last year that improved the payday loan product. One of the stated goals of last year's bill was to make the product more affordable, end the cycle of debt and not drive the industry out of Colorado. Preliminary evidence suggests that the reform has succeeded on all three goals.
However, this evidence is very preliminary. The law and the Attorney General's rules implementing it took effect in August. We only have a little more than six months experience with it. Clearly we need to give it more time to work and to gather data on its effects before we make major changes in it.