Consumers win big on payday lending battle

By Marianne Goodland

Consumers and consumer advocates for payday reform won a major battle Tuesday when the Attorney General’s office adopted rules that allow a refund of all fees on payday loans when there is early repayment of the loan.

The new rules, which grew out of legislation passed in May, were adopted unanimously by the AG’s administrator for the Uniform Consumer Credit Code and a subcommittee of the Council of Advisors on Consumer Credit.

Near the end of the 2010 session, the General Assembly passed House Bill 10-1351, a bill to put more “guardrails” on payday lending, according to its sponsors, Rep. Mark Ferrandino, D-Denver, and Sen. Chris Romer, D-Denver.

Tuesday’s vote affirmed a change of heart by the UCCC administrator, Laura Udis, regarding interpretation of the most controversial rule, 17(I)3, which said that an origination fee would not be refundable if the loan was repaid early. That raised complaints from Ferrandino and Romer that the rules did not follow the legislative intent or statute, and from consumer advocates who claimed the rule would gut the legislation.

Under HB 1351, payday lenders can issue loans of up to $500. They can charge a 20 percent origination fee on the first $300, and 7.5 percent on the next $200; for a $500 loan that’s $75. That matches the law prior to the passage of HB 1351.

What changed: payday lenders can now also charge 45 percent interest on the loan and a monthly maintenance fee of $7.50 per $100 loaned, and the amount of time a borrower has to repay the loan.

Prior to HB 1351, most loans had to be repaid in full in two weeks. Testimony from borrowers during the hearings on HB 1351 showed that many roll-over those loans, for an additional $75 fee, and continue to roll-over the loans when they can’t pay them back in full. After three renewals, lenders were supposed to offer repayment plans, although some borrowers testified that they were not offered that option.

Under HB 1351, the loan could be repaid in as much as six months, and in installments. Under the rules, the 45 percent interest would be charged from day 30 to the end of the loan, and the monthly maintenance fee would be charged beginning with day 60.

If the loan was paid back early, under two UCCC interpretations of the rules, the interest and monthly maintenance fee would be refunded on a pro-rated basis.

But what became the most contentious and controversial issue regarding the rules was in whether the origination fee, the third fee under HB 1351, could be refunded.

In the first interpretation of the rules, issued by Udis on June 18, the origination fee would have to be refunded on a pro-rated basis if the loan were paid off early.

But a July 29 revised interpretation did a 180-degree change, stating that none of the origination fee would have to be refunded, a change in the rules that was sought by the payday lenders, who claimed the fee was “fully earned” at the time the loan was issued, not when it was paid off.

In between those two interpretations, consumer advocates claimed, Attorney General John Suthers received 20 campaign contributions totaling $10,350 from payday lenders, most of it on one day — June 28 — and that those contributions influenced the change in interpretation.

However, AG spokesman Mike Saccone disputed that, saying that Udis was in charge of the rules and that Suthers played no role in their drafting.

Udis told The Colorado Statesman on Tuesday that when the original interpretation was issued on June 18, there were already questions about the issue of refunding the origination fee, which arose from a conflict in the statute from HB 1351. In the bill, as signed by the governor, the finance charge (now referred to as the origination fee) is deemed “fully earned” at the time of the transaction. However, that language was removed from the bill in the version originally passed by the House, according to Ferrandino. It was put back into the bill when it was in the Senate, under an amendment offered by Sen. Rollie Heath, D-Boulder.

The conflict arises from the same section of the bill that contained the “fully earned” language. Further down in the statute, the law says the “annual percentage rate” is refundable if the loan is paid off early. Under the bill, the annual percentage rate includes all charges, including the origination fee.

Udis told The Statesman she issued the draft rules and the original interpretation on June 18 because payday lenders were pressing for something in writing since the law was due to go into effect on August 11.

But once the June 18 interpretation was issued, staff from UCCC attempted to find out from Heath what his intention was with regard to his amendment’s language on refunds of the origination fee. Heath never spoke with the UCCC staff regarding this conflict, Udis said during Tuesday’s hearing. So the UCCC staff instead spoke to the bill drafter from Legislative Legal Services, in order to ascertain legislative intent, and after that discussion Udis said she issued the revised interpretation.

On Monday, The Denver Post reported that Heath believed the origination fee was not refundable. Heath confirmed that Wednesday with The Statesman, adding that during the negotiations over HB 1351 the issue of the language regarding the annual percentage rate never came up. “It didn’t occur to us” that it would include both the interest rate and the origination fee, Heath said. “When you refinance a home, you pay an origination fee upfront,” he explained.

Romer and Ferrandino both testified Tuesday that they had not spoken to Heath; Romer said he was “shocked” when he read Heath’s comments in The Post. “I don’t think he understood what he did,” Romer told the committee. Such an interpretation would “loosen the boundaries on predatory lending; I can’t believe that was his intent.” Romer added that the intent of the 18 senators who voted for the bill was to clearly limit the total finance charges to significantly lower levels than were previously allowed under statute. “Never in my life did I hear Sen. Heath say in the process of negotiating that we were increasing the flexibility of the industry,” Romer said.

Ferrandino told the committee that it’s not always best to rely on conversations that took place in the heat of the last days of the session, more than three months ago. He said he did not remember all the conversations that took place while the bill was in the Senate, although he said the people with the payday lending reform coalition, who were very much involved in the Senate negotiations, agreed with him regarding the origination fee refund. “I would not have approved or signed onto the deal without their agreement,” Ferrandino said, adding that the language put back into the bill on “fully earned” should not have gone back into the bill, and he suggested the committee revisit the legislative record.

Udis said there was nothing in the tapes or transcripts of the Senate second reading debate, where Heath’s amendment was adopted, to give clarity on the issue. Heath was not present at Tuesday’s hearing. He told The Statesman he had other business to deal with that day.

Those who believed the origination fee should be refundable, including Ferrandino, Romer, and Craig Welling, chief legal counsel for Gov. Bill Ritter, said that the revised interpretation could lead to borrowers paying more fees under the new law, not less. Welling, in an Aug. 23 letter to Udis, cited as an example a consumer borrowing $300 and paying it back in two weeks, which is allowed under HB 1351. The borrower would pay the $300, $60 in origination fees and $5.19 in interest, for an annual percentage rate of 565 percent. Even under the law prior to HB 1351, the borrower would have paid just the $60 fee, for an interest rate of 520 percent, Welling pointed out.

Coloradans for Payday Lending Reform said such an interpretation would incentivize lenders to encourage borrowers to pay their loans as early as possible, and then to take out new loans so that lenders could earn another origination fee.

Corrine Fowler of the Colorado Progressive Coalition, part of the coalition that supported the bill, testified Tuesday that she believed the re-insertion of language stating the finance charge (origination fee) was “fully earned” was a drafting error and should not have been put back into the bill. To allow lenders to keep all of the origination fee would “strip some of the most vital consumer protections from law,” she said. “It creates a situation that would result in same old payday lending debt trap.”

Fowler also raised the issue of the campaign contributions Suthers got from the payday lenders, stating that the industry has “vast resources to influence public policy” and had contributed significant funds to Suthers’ re-election “just after the first interpretation and prior to the revised interpretation. The timing of the [revised] interpretation is truly questionable to our coalition,” she told the committee.

In his testimony Tuesday, Scott Martinez of the Bell Policy Center told the committee that when there is conflict, “we go back to the statutory interpretation, not what legislators say post-session,” a point also made by Welling in his Aug. 23 letter. “The plain language of the statute makes it clear that the APR is meant to be refundable,” Martinez said. He also noted that when two terms are in conflict, as with “fully earned” and APR, “you adopt the term that was used latest in time,” which would be APR, since “fully earned” was in statute prior to HB 1351.

Payday lenders, represented primarily by attorney Janice Clark of Hellerstein & Shore of Greenwood Village, said the use of annual percentage rate in the legislation is not used as it is understood by lenders. “When words are not used in their technical sense, it is a mistake to read them in their technical sense,” she told the committee.

Clark explained that lenders don’t pro-rate rates, as is stated in that section of the law; they pro-rate charges that are imposed as a result of application of rates, and she said that’s where the use of APR is inaccurate in the legislation.

Clark also said that charges that are fully earned are not subject to refund; only those that are not earned can be refunded. And she pointed out that prior to HB 1351 the origination fee was never subject to refund. “If the statute is unclear or appears to be contradictory, the regulator (Udis) is to look at legislative intent,” Clark said. “The only way to read the statute in a consistent and harmonious way…[is that] the origination fee is fully earned on the day of the transaction and that interest charges and the monthly maintenance fee are subject to refund.”

Clark and Heath both acknowledged that the example cited by Welling would produce a higher fee for borrowers, but said that was the only situation under which that would occur.

Former Sen. Mike Feeley of Brownstein Hyatt Farber & Shreck, testifying on behalf of ACE Cash Express, said he had crunched the numbers for loans that are repaid in four weeks or more, and in every case the borrower would pay much less under HB 1351. For example, a $300 loan repaid in four weeks under HB 1351 would cost the borrower $66.31 in interest and origination fees; prior to HB 1351 it would cost the borrower $120, a $53.69 savings. In an eight-week period, the cost would be $72.60 under HB 1351; prior to that it would be $240, a savings of $167.40. “When you look at the calculations, you find that the legislature did place guardrails on the industry, and effective ones at that,” Feeley said.

In announcing her decision regarding 17(I)3, Udis said she was influenced by the testimony and written comments, and one other factor — an amendment offered on second reading in the Senate by Sen. Lois Tochtrop, D-Adams County. Udis said Tochtrop’s amendment, L025, would have clarified that the origination fee was not subject to refund, but the Senate did not adopt it. “The Senate could have made the change if [senators] thought the origination fee was not refundable,” Udis said. She also explained that she and the committee are left with conflicting legislative intent from Heath, Romer and Ferrandino, and in that case she has to go back to the language of the statute regarding the APR. “If that is not the intent of those in the process, the remedy is that [the law] be amended in the next legislative session,” Udis said.

Udis also sided with the payday reform supporters on two other issues: that the monthly maintenance fee could not be collected until the end of the second month, and that that monthly maintenance fee would not be collected on loans of less than $100.

While they lost on the most controversial change, payday lenders did get some of the changes they sought in the rules. Udis amended the rules during Tuesday’s hearing to allow lenders to refund the unearned fees directly to the borrower’s unpaid balance at the time of early repayment, instead of requiring lenders to issue checks or give cash refunds. She also agreed with lenders regarding disclosure language and language that lenders said would refer borrowers to their competitors.

The rules as amended Tuesday were adopted unanimously by the subcommittee and will go into effect on Nov. 29.

Following the hearing, Fowler told The Statesman they were happy with the outcome. “They really listened to those who were closest to the bill and crafting the legislation,” she said, singling out Udis in particular for her thoughtful considerations.

When asked what their next avenue would be in fighting the rules, Clark walked by without answering, although a member of her entourage whispered “No comment!”

Ferrandino said Wednesday he also was happy with the results, and that he believed the questions from the council, letters and the work of the coalition helped the committee make the right decision.

Ferrandino said he was not surprised by Udis’ decision, saying, “I’ve always felt that Laura is fair on these issues,” and he didn’t go into Tuesday’s hearing with any preconceived notion on what the outcome might be. “It could have gone either way.”

As to Udis’ comment that those who were unhappy could seek legislative remedies, Ferrandino said he had no interest in going after clean-up language to clarify the legislative intent in the next session, although he expected the lenders might do that.

While the rules will be in effect in 90 days, they also must be affirmed by the General Assembly in next year’s session through the annual Rule Review bill.