A bill to undo one of the most controversial aspects of last year’s payday lender reform legislation is flying through the House this week.
House Bill 11-1290 was introduced last Friday, March 25; passed the House Economic and Business Development Committee Tuesday, and the full House on second reading Wednesday. On Thursday, the House approved it 36-27, with four Democrats voting with the 32 Republicans present.
HB 1290 requires the origination fee charged on a payday loan to be “fully earned” at the time of the loan and not refundable.
Payday loans, or “small consumer loans,” as they are now known, were revised in state law last year and levy three types of interest charges. The first is the origination fee, which is $20 per $100 for the first $300, and $7.50 per $100 for the next $200, for a maximum loan of $500 and maximum origination fee of $75. Lenders can also charge a monthly maintenance fee, once the first 30 days have passed, of $7.50 per month per $100. The third fee is a finance charge of 45 percent. Borrowers can repay the loan anytime between two weeks and six months.
On a $300 loan for example, if paid back in sixty days, the borrower would pay $78.75 in total interest charges for an annual interest rate of 157 percent. Prior to the 2010 law, the loan had to be repaid in full every two weeks. If the loan were paid off and re-issued every two weeks, which was common, the interest charges in 60 days would be $240, for an annual interest rate of 480 percent.
Rep. Larry Liston, R-Colorado Springs, who chairs the business committee, co-sponsors HB 1290 with Rep. Jim Riesberg, D-Greeley, one of five Democrats who opposed the reform bill, HB 10-1351, last year. In the Senate, HB 1290 is sponsored by Sen. Rollie Heath, D-Boulder, who authored major amendments on the 2010 bill. In the Senate, in addition to Heath, the bill is co-sponsored by three other senators, including Sen. Mary Hodge, D-Brighton, and Sen. Lois Tochtrop, D-Adams County, who both voted against HB 1351 last year.
Liston told the business committee Tuesday the bill was a simple one and intended to clarify the intent of the 2010 legislation. Liston said the only purpose of the bill is to ensure “complete clarity” about the origination fees. Loan origination fees are nonrefundable, and HB 1290 would create certainty for lenders and consumers, he said.
HB 1290 would “gut the consumer protections” of last year’s bill, said Rep. Mark Ferrandino, D-Denver, during Wednesday’s debate (Ferrandino sponsored the 2010 legislation). Making the origination fee fully payable at the time of transaction would increase interest rates by 289 percent, he said. “It also increases the ability of payday lenders to ‘churn’ the loans,” an incentive for payday lenders to get customers to pay off the loans early and then take out new ones, he said.
Rep. Roger Wilson, D-Glenwood Springs, who voted against HB 1290 in the business committee, said Wednesday he was surprised the bill didn’t have “something in it about breaking their knees if [borrowers] don’t pay off their loans in time,” which earned him groans from legislators.
Tuesday’s business committee hearing had little of the drama that dogged last year’s legislation, although the hearing wasn’t completely free of it.
Carol Stewart, senior vice president for Advance America, testified that the industry did not ask for the payday loan reform legislation in 2010. “We agreed to the compromise because we were told multiple times, both in public and private, that the [new payday loan structure] included a nonrefundable origination fee,” she said, which covers loan processing costs, salary and health benefits, rent and bad debt.
Rich Jones of the Bell Policy Center said that making the origination fee nonrefundable would create a disincentive for borrowers to pay off their loans early. In addition, more time is needed to determine the effects of the 2010 legislation on payday lenders and borrowers, data that Jones said is collected annually by the Attorney General but that not enough time has passed for that information to be updated.
Corrine Fowler of the Colorado Progressive Coalition and Coloradans for Payday Lending Reform told the committee HB 1290 would strip vital consumer protections from current law. It will create a situation “that will result in the same old payday lending debt trap, a loophole that allows lenders to collect $75 every two weeks or every month,” and which undermines the intention of HB 1351, she said.
The drama in Tuesday’s hearing came in an exchange between members of the Colorado Progressive Coalition and a lobbyist for the payday loan industry, which took place in the back of the House hearing room. The exchange prompted Rep. Chris Holbert, R-Parker, to storm out of the room and order a House sergeant to remove the coalition people from the Capitol. Jason McKain, the coalition’s co-executive director, said he told the payday lender that “you might have bought this committee, but this issue will never go away and we’ll be back.”
Holbert told The Colorado Statesman Wednesday that he did not hear the exchange but saw one of the coalition representatives pointing his finger at the lobbyist, Micki Hackenberger, in a manner that Holbert described as “intimidating. Citizens have to feel comfortable coming here-they should be able to [participate in hearings] absent any level of intimidation.”
HB 1290 passed the committee on a party-line 7-6 vote.
The battle over the origination fees dates back to the 2010 rulemaking process that took place after HB 1351 was signed into law by Gov. Bill Ritter last May.
Over the summer, the Attorney General’s division of Uniform Consumer Credit Code (UCCC) began working on the rules that would govern the payday lending industry under HB 1351.
The first draft of the rules, released June 18, said the origination fee could be refunded on a pro-rata basis if the borrower paid off the loan early. A second draft, released July 31, reversed that position and said the origination fee was fully earned (and nonrefundable) at the time of the transaction.
In a July 23 letter on the rules to the UCCC, Craig Welling, Ritter’s chief counsel, said the plain language of HB 1351 made it clear that the annual percentage rate, which included all finance charges, was refundable on a pro rated basis. Under the interpretation devised by the UCCC, borrowers who prepaid 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.”
UCCC Director Laura Udis reversed herself at the end of an Aug. 31 hearing, deciding that the origination fee should be refundable on a pro-rated basis for early loan payoffs.
During testimony in the August hearing, Ferrandino said he had always intended that the origination fee be refundable, as did the bill’s Senate sponsor, Sen. Chris Romer, D-Denver. Heath, who sponsored amendments to HB 1351, did not testify during the August hearing nor did he ever speak with the staff of the UCCC, who sought to clarify what he intended with his amendments.
Heath told The Statesman last week that it was always his intention that the origination fee be fully earned at the time of the transaction, and HB 1290 would “put into effect what I thought we negotiated” last year. “This is what I thought we had done and don’t understand how the [UCCC] came up with a different interpretation. In good conscience, I needed to do this,” and Heath said he believed the latest bill could pass the Democrat-controlled Senate.
Liston told The Statesman the bill would “tweak” the rules and that he agreed with Heath’s intent in last year’s legislation. “As the rules were interpreted, they were very detrimental to the people in the business,” Liston said last week. He estimated that 160 stores have closed in Colorado since the passage of HB 1351 and if “each store employs three people, that’s more than 450 jobs.” Rep. Andy Kerr, D-Lakewood, disputed that claim Thursday during the final House vote, noting that 100 of those stores closed in 2009, a year before the passage of HB 1351.
With the passage of HB 1290 now done in the House, attention now turns to the Senate, and most importantly, its committee assignment.
Senate President Brandon Shaffer, D-Longmont, who makes that decision, said Monday that HB 1290 will be a “difficult bill for our caucus,” but that he hoped the Senate could avoid the acrimony that followed the passage of the 2010 legislation.