Payday lending bill needs payday in House to pass

By Marianne Goodland

The second effort by Rep. Mark Ferrandino, D-Denver, to get a bill cutting interest rates for payday lenders got its first hearing in the House Monday, and could be up for full (and lengthy) debate in the full House as early as Friday, Mar. 12.

Counter-protesters from the Colorado Progressive Coalition, dressed in shark costumes, attract attention at the rally.
Photo by Marianne Goodland/The Colorado Statesman

House Bill 1351 as introduced would limit the interest rate a lender could charge for a payday loan to 36 percent. It also would ask voters to approve the change in the next election.

Payday loans became part of Colorado after a 2000 bill passed by the Legislature that exempted these types of loans from usury laws. The 2000 bill, SB 144, set up the finance charges for loans as 20 percent for the first $300 plus 7.5 percent for amounts above $300 up to $500, the maximum allowed under a payday loan. Consumers repay the loan with a post-dated check, usually within two weeks or less, and must provide proof of steady employment and a checking account.

The 2000 law did not limit the number of payday loans a person could take from multiple lenders and did not limit the number of times a person could roll-over the loan. In 2007, Rep. Debbie Benefield, D-Aurora, sponsored HB 07-1261, which would limit the number of consecutive loans to four; after four, the lender must offer a repayment plan that would spread out the loan and interest over at least six payments.

According to Americans for Fairness in Lending, 15 states and the District of Columbia have outlawed high-interest payday loans. Congress has also placed a 36 percent APR interest limit on payday loans to members of the armed forces.

A payday loan works this way: A person takes out a $300 loan and is charged a $60 fee, payable in two weeks. But in two weeks, the person doesn’t have the $360 to repay the full amount, so that loan is rolled over for another two weeks. The person pays the $60 fee at that time, and then owes $360 in two weeks. But if the money still isn’t there, it’s another $60 and the person still owes the original $360.

After four rollovers, some people pay off the loan and get a new one, or they go to another lender and get a second loan, continuing the cycle.

The House Judiciary Committee approved HB 1351 on a party line 7-4 vote after approving an amendment to remove the language regarding the voter referendum.

Monday, owners of payday loan stores and their employees staged a noisy noon rally on the west steps of the state capitol. Industry representatives told the crowd that HB 1351 would drive 500 retail locations out of business, cost 1,600 jobs and affect services to 300,000 Coloradans. “Don’t take our jobs!” payday lenders and employees shouted. “This bill singles out an industry because of a few anti-job extremists,” Tony Gagliardi of the National Federation of Independent Businesses told the crowd, which numbered more than 300.

The rally also drew two people from the Colorado Progressive Coalition, dressed in shark costumes, who carried signs accusing payday lenders of being sharks.

Monday’s hearing was held in the Old Supreme Court Chambers with a standing-room only audience. A second room in the basement for listening to the hearing was opened to accommodate the overflow.

Ferrandino told the judiciary committee Monday that the average person takes out 7.8 loans per year, averaging $369 per loan, with an annual percentage rate (APR) of 316 percent; 50 percent of borrowers take out 12 or more loans per year at one payday loan store. If a payday loan lender makes a profit of 36 percent on a loan, “do we need an industry that charges 316 percent interest?” he said. “We need to hold them to the same standard as other lending institutions.” It’s not access to credit — “it’s access to debt,” he said.

“Is it your fundamental belief that payday loans are so defective a product that they shouldn’t be in the market?” asked Rep. Bob Gardner, R-Colorado Springs. Ferrandino replied that the average person who takes payday loans will eventually file for bankruptcy.

Ferrandino acknowledged claims that his bill will cause some payday lenders to go out of business — in other states that have passed similar legislation there has been a “significant reduction” in the number of payday loan stores. “If this passes, there will be a huge contraction in the marketplace,” which Ferrandino said is not his intent. However, a loan at 340 percent is not a product that is helping people, Ferrandino said.

The hearing began with stories from a half-dozen witnesses who had been through the payday loan cycle. Mercy Salazar recounted how two years ago she needed an emergency loan for a car repair. She got $500 from a lender and every pay period turned over $75 to the lender. Eventually, she had to go to a second lender, and wound up cycling 20 loans from the two lenders. A friend then came to her rescue. A repayment plan didn’t help, she said, because by then she already had multiple loans with multiple stores. “People are desperate,” Salazar said. “Payday loans can seem like the only option because there are so many of them — you’ll find them in front of every bus stop,” she told the committee. Another witness said she was filing for bankruptcy because of multiple payday loans, and still another recounted that she paid $2,200 in fees for a $480 loan over the course of a year, and at one point had loans from five lenders.

Rich Jones of the Bell Policy Center said the lifeblood of the payday loan industry is the repeat borrower and it is a product that traps people in a cycle of debt. As to the concerns over payday loan stores closing, Jones pointed out that many do more than just issue loans; they cash checks, offer prepaid credit cards or do bill paying. As to what borrowers would do without payday loans, Jones pointed to North Carolina, where payday lenders have remained, offering loans at 36 percent. A recent study showed that borrowers did better without payday loans, he said — they found other sources of credit.

Several members of the clergy, who work with low-income consumers, also testified to the harm of payday loans. “It is a matter of moral imperative” to pass this bill, said the Rev. Bill Kirton of the Interfaith Alliance of Colorado. Kirton said that Christianity, Judaism and Islam all have issues with usury, particularly for the economically disadvantaged. He recounted the New Testament story of Jesus throwing out the moneychangers from the temple in Jerusalem. “He threw them out because of the morality of the issue, not because he was anti-business,” Kirton said.

Rep. Daniel Kagan, D-Englewood, suggested passing the bill would offer a different moral dilemma — by prohibiting people from getting high interest loans “because we believe they won’t use them wisely.” Kirton said he was not suggesting there should be no access to payday loans. The issue, he said, is that the lenders take advantage of the economically disadvantaged.

Jenny Kraska, executive director of the Colorado Catholic Conference, told legislators that lending practices “that take unfair advantage of one’s desperate circumstances are unjust,” and that Catholic teachings warn against usury and exploitation. That prompted Gardner to ask if the faith-based community was prepared to step up and fill the gap if payday loan stores go out of business. “We already are,” said Kraska, through a variety of statewide Catholic charities. But Kraska said they were not advocating that payday loan stores go away, just that their interest rates should be capped at a reasonable rate.

Aimee Randall, an employee of the banking industry, said she spent five years working with high-risk checking accounts. She saw the “death spiral,” the $500 check presented along with the $75 fee, often presented separately and sometimes the borrower did not have sufficient funds. The bank then also charged a non-sufficient funds fee for one or both checks, for an average of $72. The customer has spent $150 to access $500, she said. In addition, loans are not supposed to exceed 25 percent of the customer’s income, Randall, said, but she questioned whether that was accurate, stating that she’d seen the income and the loans, and it definitely exceeded 25 percent and even 50 percent.

Employees, store owners and customers of payday loan stores spoke just as strongly in opposition to the bill.

Stacey Stolen, a payday loan customer and single mother, said while she could relate to the stories of other witnesses, she does rely on payday loans. “I would rather pay them the $60 than the $120 in return check fees. I have the right to make that decision,” she said.

Lynn DeVault, owner of 1,148 Check Into Cash stores nationwide, told the committee her customers make rational, informed decisions when making a payday loan. She said the APR comparison is misleading. A $100 loan costs a maximum of $20, whether it is for 14 days, 28 days or more — there’s no accrual of interest. By contrast, she said, overdraft protection on a $100 check is $29, a $100 bounced check costs $56; late fees on a credit card is $37, and utility bill late fees and reconnect charges are $46.

In addition, if the state goes to the 36 percent APR, she said, a lender could charge only $1.38 for a two-week $100 loan. That’s a 93 percent reduction in gross income, DeVault explained. “That’s not reform, that’s an outright ban…There will be no payday loans in this state at 36 percent.” Regarding the repayment plan, DeVault said 24 percent of her customers, about 1,616; are in repayment plans. “That is a free loan, from me, for 60 days,” she told the committee.

The validity of a North Carolina study on payday loans cited earlier by Rich Jones was disputed by Mark Thomson of Moneytree. Thomson said he had two academic studies that showed access to payday loans improves consumer welfare. In addition, he said the North Carolina study had surveyed 400 people and only 20 had ever had a payday loan.

Ron Rockvam is owner of Money Now, an independent payday loan business in Colorado, and is also president of the Colorado Financial Service Centers Association. Rockvam said HB 1351 is designed to do one thing: eliminate the payday advance product from Colorado. “Is such blunt action warranted?” he asked. Rockvam said there may be ideas on how to improve the service, and he said he is more than willing to work with the legislature on that. “We cannot help with meaningful reform when we are gone,” he said. There are 248 “mom-and-pop” independent payday loan stores in Colorado, Rockvam told the committee, and they will close if the bill passes.

At the behest of Rep. Lois Court, D-Denver, the committee amended HB 1351 to remove the language requiring voters to approve the interest rate limit. Ferrandino said he had put the referral on the bill to avoid what happened in Ohio. Once the bill was signed by the Ohio governor the payday lenders petitioned to pull the law and had it sent to voters, and Ferrandino said he believed payday lenders would do the same in Colorado.

Court told The Statesman this week that there has been speculation about why she carried the amendment to take the voter referral out of the bill. “I believe in the system the founders created,” she explained; “a democratic republic.” Legislators are elected to decide state law, Court said, and “I believe in doing the job I was elected to do” rather than sending it out to the voters.

Ferrandino is busily counting votes this week; as of Monday he said he thought the bill had 29 strong “yes” votes from Democrats and was working on eight “maybes” from other legislators. As of Wednesday, he said that number was up to 31, with a half-dozen votes still to be determined. Ferrandino recalled the vote from his 2008 bill, where he said he didn’t know if he had 33 votes until the actual vote. (That bill, HB 08-1310, died in Senate Appropriations.)

However, six Democrats who voted against HB 08-1310 are still in the House, including Benefield. If the same six vote against HB 1351, Ferrandino would need at least one Republican and Rep. Kathleen Curry, U-Gunnison, to vote for it. Curry did vote for HB 1310 in 2008, as did Rep. Ellen Roberts, R-Durango.