By Marianne Goodland
THE COLORADO STATESMAN
Next Tuesday, Aug. 31, new proposed rules governing payday lenders in Colorado will be reviewed by the Attorney General’s division of Uniform Consumer Credit Code (UCCC). The current proposed rules, released July 30, have already garnered pages of written comments, both from those who supported House Bill 10-1351, the bill that changed payday lending law; from the chief legal counsel for Gov. Bill Ritter; and from payday lending companies and the Colorado trade association that represents them.
At the heart of some of the comments are concerns that a key rule changed substantially between June 18, when they were first released, and a revised version released on July 30 — and that Attorney General John Suthers suddenly got more than $10,000 in campaign contributions from payday lenders during a ten-day period while the rules were being revised.
HB 1351 changed the law about how much payday lenders could charge on a short-term loan. Prior to HB 1351, a payday lender could charge $60 on a $300 loan, and that loan could be renewed every two weeks, with another $60 assessed on each renewal. That meant the borrower then had to pay the original $360 plus another $60. Under that kind of scenario, borrowers could pay hundreds of dollars in finance charges before paying back the loan principal, at interest rates cited in legislative testimony as high as 316 percent.
Under the law created by HB 1351 which went into effect on August 11, the interest rate is capped at 45 percent, and the repayment period would change from as little as two weeks to as much as six months. Lenders could still charge an origination fee of $60 on a $300 loan and a monthly maintenance fee of $7.50 per $100 loaned after 30 days. Lenders also can collect interest at 45 percent per annum. Finally, under HB 1351, borrowers could pay off their loans prior to the end of the six months without penalty. On a $300 loan, for example, and under the rules originally proposed in June, if a borrower chose to pay it off in 60 days, the borrower would pay the $300, the $60 origination fee, $7.50 for the monthly maintenance fee and $11.25 in interest charges. With those charges ($78.75) the interest rate and finance charges would add up to about 157 percent on an annual basis. Without the changes from HB 1351 the total charges for that $300 loan over 60 days (at a renewal of every two weeks) would be $240, for an annual rate of 480 percent.
The rule that generated the most comments from proponents of HB 1351 is rule 17(I)3, which deals with how much of a refund consumers can get on fees if they pay off loans before the end of the term. The rule as revised in July states that if a consumer prepays a loan in full prior to the final payment date, the lender must refund on a pro-rata basis unearned portions of the interest or monthly maintenance fee, but does not have to refund any of the origination fee, which can be as much as $75 on a $500 loan.
According to a July 31 UCCC interpretation of the law that outlines proposed rules, the language of HB 1351 was not clear about this. “The Administrator recently learned that those involved in crafting the language believed that only the 45 percent rate of interest must be refunded,” the interpretation said.
That isn’t what the proponents of the bill understood it to be, nor did it sit well with Craig Welling, Ritter’s chief legal counsel. In a letter sent to the UCCC on August. 23, Welling wrote that legislators’ remarks, which he said the UCCC used to justify the change, are not legal legislative history and cannot be used as a basis for crafting the rules.
Welling also said that the plain language of HB 1351 makes it clear that the annual percentage rate, which includes all finance charges, is refundable on a pro rated basis. Under the interpretation devised by the UCCC, borrowers who prepay debt on payday loans “would face more fees than they would prior to passage of HB 1351,” Welling wrote, which would lead to an “absurd result.” For example, he wrote, prior to the passage of HB 1351 someone who repaid a $300 loan in two weeks instead of four weeks would pay a $60 nonrefundable finance charge but would not pay interest or the monthly maintenance fee. If the rules went into place as written, the borrower would also have to pay prorated interest. In both cases, the interest rate for that two-week loan would exceed 500 percent, according to Welling’s example; in the case of just the $60 finance charge, the interest rate would be 520 percent; with the additional interest of $5.19 it would be 565 percent. “Increasing the annual percentage rate from 520 percent to 565 percent would frustrate legislative intent to the point of absurdity,” Welling said.
Welling told The Colorado Statesman that there is a conflict in the statute that led to the revision, but it should not have been interpreted in a way that leads to a higher interest rate for borrowers, which goes against the legislative intent of HB 1351.
The same rule drew criticism from Coloradans for Payday Lending Reform, one of the chief proponents of HB 1351. According to an Aug. 23 letter authored by Rich Jones of the Bell Policy Center and signed by representatives of three other member organizations of CPLR, all fees associated with the loan must be refunded on a pro-rata basis upon prepayment: finance charges (the origination fee), the 45 percent interest rate and the monthly maintenance fee. The CPLR letter notes that the UCCC right to prepayment section provides a “more strict limitation on the finance charge retention, stating that the lender cannot keep more than $25 of any finance charge or the amount ‘already earned,’ whichever is less.”
Jones told The Statesman this week that two sections were added in the July revision of the rules that differed substantially from the June draft. The key change was dealing with the amount of the refund. In June, the rule said all fees were subject to refund, because of an interpretation tied to the Truth in Lending Act that says all fees become part of the total finance charge (and which is subject to refund under HB 1351). “Our concern is if the origination fee is not refunded you create an incentive on the lender side to pay off the loan early, wait a bit, and then sell another loan [and collect another origination fee]. In the June language there is no incentive to do that,” Jones explained.
Rep. Mark Ferrandino, D-Denver, the chief House sponsor of HB 1351, plans to be at next week’s hearing, and also takes a dim view on the wording of 17(I)3. Ferrandino admitted he was not involved in the discussion when HB 1351 went into the Senate, where many of the major changes in the bill took place. But he said that the intent was that all finance charges, including the origination fee, were to be treated in the same way as interest, and earned as the loan went on. If lenders were allowed to keep all of the origination fee without it being pro-rated for early pay-off, it would allow lenders to “game the system and it will be more beneficial to them. The intent was to protect consumers…[the revised rule flies] in the face of the intent of the Legislature,” he said.
Lender comments came from Moneytree, Speedy Cash Holdings; and an attorney representing COFiSCA, the trade organization that represents Colorado payday lenders. Ron Rockvam, who owns Money Now in Fort Collins, is president of COFiSCA; Rockvam gave Suthers $500 in campaign contributions during the 10-day period prior to the revision of the rules. No other payday lenders who gave Suthers campaign money submitted comments.
Janice Hofmann Clark of Hellerstein and Shore, PC, representing COFiSCA, said in an Aug. 23 letter to the UCCC that her client agrees with most of the rules as revised in July. COFiSCA still had issues with rules regarding recordkeeping and disclosure, and with the monthly maintenance fee.
With regard to the rule regarding refunds of interest charges for early repayment, COFiSCA’s position is that there is no such thing as unearned interest. “All interest assessed and paid on a simple interest basis is interest which is earned,” Clark said. Hence, “there is no unearned interest to refund.” COFiSCA also took issue with another part of rule 17, which would require lenders to pay any refund of interest from prepayment by cash, check or similar method, which would create “an unnecessary burden on consumers.” Clark wrote that lenders and consumers alike would prefer to credit the unearned interest to the outstanding balance instead of having to issue a check to the consumer for any unearned interest refunded.
In an Aug. 23 letter, Thomas Steele, general counsel for Speedy Cash Holdings of Wichita, Kan., asked that the rules be implemented in 90 days so companies could allow time for their information technology departments to make necessary computer changes. Steele’s letter took issue with the UCCC’s interpretation of the monthly maintenance fee, which said it could be assessed in the second through sixth month of the loan, not in the first month. Steele said legislative history and the bill itself was clear that the fee could be earned after the first 30 days; lenders did not have to wait until 60 days to collect it.
Finally, comments, which were due on Aug. 23, were also submitted by Mark Thomson of Money Tree, Inc. Similar to those expressed by COFiSCA, Thomson had the same concerns about recordkeeping and disclosure issues contained in the rules. With regard to the monthly maintenance fee, rule 17(D)2 states that it cannot be charged on loans of less than $100; Thomson said there was no such prohibition in statute. He agreed with COFiSCA that there is no such thing as unearned interest, and that making refunds to consumers in cash or check instead of applying a credit would also be a burden.
In between the release of the two drafts, and according to an Aug. 14 story in the Grand Junction Daily Sentinel, Attorney General John Suthers got more than $10,000 in campaign contributions for his re-election bid from 11 payday lenders. Prior to June 28, when the first contributions came in, Suthers had gotten just two contributions, of $500 each, from ACE Cash Express, both in December of 2009. The Daily Sentinel article also pointed out prior to 2009, Suthers got just one $500 contribution from a payday lender four years ago when he first ran for office.
However, Mike Saccone, spokesman for the Attorney General’s office, said Suthers had no hand in writing the rules. Saccone explained that Laura Udis, the director of the UCCC office, was the person who wrote the rules in conjunction with nonpartisan staff. Udis has worked in the AG’s office since 1980, and been in charge of the UCCC office since 1988 and in that capacity has worked under four different attorneys general, Saccone said.
With regard to the revision of 17(I)3, Saccone said Udis attempted to contact Sen. Rollie Heath, D-Boulder, who had offered an amendment that became the basis for the July revision. Heath was out of state, Saccone said, so Udis contacted the staff member from the non-partisan Legislative Legal Services who wrote the amendment.
And while the hearing on Aug. 31 will give everyone an opportunity to speak their mind on all of the rules, it’s far from the end of the process.
Once the hearing is concluded, the rules go to a subset of the nine-member Council of Advisors on Consumer Credit, which is appointed by the governor, and which advises the UCCC on lending issues. The four-member panel will be joined by a designee from the AG’s office, and will then review the rules. Ultimately, however, the last word on the rules will be made by the General Assembly, through its annual rules review bill. The rules are not permanent until that bill is signed by the governor.
Most of the letter writers state they will be in attendance at next Tuesday’s hearing, which starts at 1:30 p.m. in room 243, 1525 Sherman St., Denver.