Last week at the Rollie Heath town hall I had a chance to ask for his support on the payday loan legislation HB 1351. His response in short was that he agrees with the spirit of the legislation and would like to end the “churning” of payday loans; however, “the payday credit rate,” he said, “is just too low at 36% for the business to exist in Colorado.”
Sen. Heath obviously believes that some “payday industry” should exist in our state and the industry has convinced him that they cannot continue to provide credit with a 36% cap on annual interest. Many people do believe that there is a social need, as well as a reasonable market for small short-term loans. Some see the 36% cap on payday loans as destroying the industry in Colorado, because no business could effectively service a small loan for that amount of money.
One of the differences in a payday loan is that the borrower does not have the option to pay down the principle. If you got a two week loan of $500, you would have to pay $575 two weeks later. There is no option to pay a portion of the principle to decrease the percentage owed. Likewise, to get around offering people a payment plan as the Colorado legislature intended, an individual is allowed to immediately take out another loan at the same amount. The result is that the two-week, short-term loan turns into a high-interest long-term loan. Many people, unable to pay the entire principle, end up paying the payday industry much more to service the loan than the value of the loan.
While most people would say that the payday spiral is bad, it is open and borrowers know what they are getting into when they get a payday loan. They argue that although it is not good practice, it obviously fills a needed gap in credit that is not provided by traditional banks and credit unions. At the hearing two weeks ago in front of the house judiciary committee, opponents of HB 1351 highlighted the jobs that could be lost because of the bill.
It was the CPWD, Bridges out of Poverty group that noticed the harmful impact of payday loans. By focusing on the interest rate, the Colorado legislation has missed the trappings of the payday loan industry that the CPWD group found most troubling. It is not the rate, but the payday loan practices that make the industry a detriment to our community and stagnates low-income residents move from poverty. Over three-quarters of the loans are “churned” or created by the payday loans themselves. Moreover, the borrowers’ inability to pay down the principle makes the payday loan a reoccurring two-week barrier to real credit for people who need a short-term loan.
Before the Colorado legislation that deregulated lending and created the current large payday industry in Colorado, there were some short-term loans in our state. What Senator Heath points out is that there is a need for these short-term loans, and fixing the interest rate does not fix the troubling payday loan practices. Without addressing the problems of payday loans, the legislation does not seem to have strong support and will likely not get through the Colorado Senate as it stands now.
- Tim Wheat