Payday lenders preparing attack on last year's reforms
We recently found out the payday lending industry is working with several legislators on a bill to undo the progress we've made improving what were the most dangerous loan products on the market.
A bill likely to be described as a "technical" amendment will propose that the origination fees for these loans be made non-refundable. This could significantly increase the cost of these loans, and it will reintroduce a strong incentive for lenders to entice borrows to pay off loans early and take out new loans. This is called churning, and it is the process by which so many borrowers got trapped under the previous law.
We have been working to reform payday lending in Colorado for more than four years, and we, along with the other members of Coloradans for Payday Lending Reform, are ready to do what it takes to defend the hard-earned victories we achieved.
This is an important issue for the Bell and our opportunity agenda. Payday loans came into being in Colorado in 2000, when the legislature voted to exempt them from the state usury laws. Once exempted from the 36 percent interest cap, the effective annual interest rates for these short-term loans rocketed as high as 500 percent. These exorbitant rates, coupled with a two-week repayment period, ended up trapping many borrowers in a cycle of debt and stripping tens of millions of dollars each year from low-income communities.
Our interest has always been consumer protection. These were dangerous products that hurt people and families. If they were toasters that exploded or baby cribs that malfunctioned, we would have pulled them from the market immediately. Instead, we had to fight through three legislative sessions to finally get a bill that restructured these loans to give borrowers a reasonable chance of not falling further into debt.
Then we submitted evidence and testimony to the Attorney General's Office, which implemented regulations that kept that promise to consumers. The key battle was over whether the origination fees are to be refundable. In the end, the AG got it right. The regulations ensure that origination fees are refundable – a decision that removes a financial incentive to churn loans and trap borrowers in a cycle of dept.
The reforms appear to be working and should not be changed. So far, borrowers indicate the new loans are more affordable and that they can to repay them on time. The new law seems to have transformed the old business model, which forced many borrowers to roll over or take out costly loans every two weeks.
Meanwhile, a large majority of payday lenders remain in business and seem to have adapted to the new rules. In fact, the CEO of EZ Pawn told stock analysts recently, "We're about two and a half months into that product and we are frankly happy, very happy with what's going on (in Colorado)."
Payday lending reform means greater economic stability for thousands of Colorado families. It is working, and we intend to do everything we can to prevent the industry from rolling back these important gains for Colorado consumers.