Living Independently

Rollie Heath at the Boulder town hall meeting

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.

The Boulder town hall

- Tim Wheat

System Change Payday

Rep. Mark Ferrandino, sponsor of HB 1351 testifies 3/8/10

A Longmont resident in the CPWD “Bridges out of Poverty” class has found that Main Street Longmont has 17 Payday Lending stores. Because the Colorado legislature is now considering capping the payday lending percentage at 36% and CPWD is actively working to understand the financial barriers that prevent our community from achieving independence, I felt this would be a good topic for the first installment of the CPWD blog.

The first thing about payday loans that the industry wants you to believe is that it is a “product” like a toaster or fried chicken. They oppose “government regulation” that will cost needed jobs; after all, this is America. The payday industry claims that they fill a necessary gap in lending and credit, many of their customers are middle-class and without payday short-term credit, working class people couldn’t get a needed car repair, pay late bills and avoid marks to their credit.

But the “loan” is a trap. Although low-income members of our community may need short-term credit choices, payday lending as it now exists in Colorado drives off reasonable lending products that could help really help people in emergency situations.

Mercy Salazar was the first payday borrower to testify to the Colorado House Judiciary Committee today. She needed $500 for car repairs and paid $575 for the first two weeks. Unable to pay the principle $500 back, she paid another $75 next payday.

In 2000 when the state legislature created this payday system, they legislated that a borrower could only refinance a lone once (pay the fee again). But the payday loan business in Colorado has a way around this common-sense regulation; customers may take out a new loan the moment they pay off their existing loan. These multiple “short-term” loans really are extremely high-interest loans.

There is no payment option, so a borrower may pay off part of the principal over time when they take out the loan. The payment plans are only offered after someone has been caught in the spiral. Ms Salazar told of how she was stuck in this trap, continually paying $75 a month because she was unable to scrape together the $500, paying eventually many times more than the value of the loan.

Rep. Ferrandino says that the payday industry is not providing access to credit, “it is access to debt.” He also confronts the lost payday jobs by suggesting reasonable lending rates would pump $80 million dollars into the Colorado economy.

Because payday loans are so available and profitable, there are few comparable or competing loans from traditional institutions. Rich Jones of the Bell Policy Center told how the payday loans were crowding-out alternatives, banks and credit unions for the market.

Finally, I think about Main Street in Longmont. Three and a half billion dollars are squeezed out of customers nationally in these fees. This is not the cost of the first loan, which the payday industry contends is so needed in our community; those are the billions in a bonanza that the payday industry takes from many who cannot afford it after the next payday.

Rene Beauregard observed that the past Colorado legislation on payday lending is much like the payday industry itself, “the need was created by the solution.”

System Change Legislation, Payday