Payday bill to raise fees on borrowers passes House

Last week, in breakneck speed, the House approved a bill that would increase the fees that payday borrowers must pay if they repay their loans early. It creates a financial incentive for payday lenders to churn the accounts and weakens the six month minimum loan term that was at the heart of last year's reforms.

Described by proponents as a "technical" amendment and a "clean-up" to last year's payday lending reform law, House Bill 11-1290 passed out of the Business and Economic Development Committee on a party line vote on March 29 and passed the full House on March 31.

This is NOT a technical amendment or a clean-up bill. It would overturn the Attorney General's ruling last year that the finance charge on payday loans must be refunded on a prorated basis determined by how long the loan was outstanding. Under the proposed bill, the finance charge, amended to "origination fee" by HB 11-1290, would be non-refundable.

As a result, it would add $50 in costs to a borrower who pays off a $300 loan in 30 days, driving up the annual percentage rate (APR) from 86 percent to 289 percent. This not only penalizes borrowers for getting out of debt sooner but creates a strong financial incentive for lenders to once again "churn" the loans in order to capture higher fees.

It would completely undermine the intention of last year's bill, which was to lower the costs of these loans and put an end to repeat borrowing. Instead, it will lead to borrowers getting trapped in the same old payday debt cycle.

Preliminary evidence suggests that the reforms adopted last year are working. Borrowers report that the loans are more affordable and they are able to pay them off on time. However, this evidence is very preliminary. The law and the Attorney General's rules have only been fully implemented since November 2010. We have less than six months experience with it. Clearly, we need to give the reforms more time to work in order to gather data on their effects before we make major changes.

Proponents argue that this bill does not add new fees or increase existing fees. However, they also argue this change is needed because the payday lenders cannot make enough money under the current law, which allows an APR of 162 percent, and have closed stores in Colorado. How would this proposal help payday lenders stay in business if it did not provide them with additional revenues? Revenues that come from the fees that fall on the backs of the predominantly low-income borrowers who use these loans.

It is true that the industry closed 117 payday lending stores in Colorado during 2010 and up through mid-March 2011. However, the number of stores in Colorado has been shrinking since 2006 when there were 661 payday lending stores – more than the number of Starbucks and McDonald's stores combined. Since then the number has dropped each year with 105 being closed in 2009. This industry has been consolidating for several years, even years when no payday lending legislation was adopted. In fact, we currently have 352 payday lending stores operating in Colorado and the CEO of EZ Pawn, a payday lender with 40 stores in Colorado, told investors and stock analysts that his company was "happy, very happy with what is going on (in Colorado)."

As the bill moves to the Senate, it is critical that Senate leaders understand that this change raises the costs of payday loans for the mostly low-income borrowers at a time when these families are struggling to make ends meet. This legislation strikes at the heart of last year's reforms and creates an incentive for payday lenders to restore their old business model of churning loans every two weeks and charging high fees for every new loan.

We do not know which committee HB 11-1290 will be assigned to in the Senate. However, it is critical that you tell key senators such as Shaffer, Heath and Johnston that HB 11-1290 raises the costs for low-income borrowers, rewards payday lenders for churning accounts and undermines last year's reforms. In short, HB 11-1290 is bad policy and should be defeated.

Contact information:

Senator Brandon Shaffer
303.866.3342 - brandon@brandonshaffer.com

Senator Rollie Heath
303-866-4872 - rollie.heath.senate@state.co.us

Senator Mike Johnston
303-866-4864 - mike@mikejohnston.org