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Payday loan overkill

Lawmakers should give last year's bill a chance to work

The Rocky
Tuesday, March 4, 2008

A bill in the legislature targeting payday loans threatens to extinguish an important (and yes, expensive) credit lifeline for thousands of Coloradans.

And while backers of House Bill 1310 portray the fees attached to payday loans as exorbitant or even "predatory," in many cases those costs may be less than the alternatives available to borrowers in the short term, such as bouncing checks or paying late fees on overdue bills.

Since a law that took effect in July seems to address one of the main concerns about the "debt trap" that afflicts some payday borrowers, we think HB 1310 is overkill, and could indeed run the industry out of the state.

HB 1310 would subject payday lenders to the same 45 percent annual interest rate cap that applies to loans made by conventional banks and financial institutions. The bill would reduce the maximum transaction fee on a $500 loan from $75 to $60, and also extend the minimum term of a payday loan to 30 days - most are now due in two weeks.

The upshot: A consumer who borrowed $300 would pay less over a month than that person now pays in two weeks. HB 1310's proponents maintain that profits would still be sufficient, but industry officials say the bill would drive many payday lenders from Colorado.

There's evidence to back that claim from Oregon, where a similar law took effect in July. The number of payday lenders operating there went from 329 on June 30 to 121 at the end of December. Should payday lending evaporate in Colorado, too, consumers who now rely on that form of short-term debt could see their financial situation further deteriorate.

Consider a November 2007 study by the Federal Reserve Bank of New York on the effect that a ban on payday lending had in two states. It concluded that "Georgians and North Carolinians do not seem better off since their states outlawed payday credit [in 2004 and 2005, respectively]: they have bounced more checks, complained more about lenders and debt collectors, and have filed for Chapter 7 ('no asset') bankruptcy at a higher rate."

As we said in November, for some residents who don't have access to other forms of credit, or ready access to cash, payday loans can be the least expensive option when money gets tight. Late fees or bad-check charges can exceed the transaction costs of a payday loan. Repeatedly missing bill payments can mean the end of check-writing privileges and further damage credit scores.

Last year Gov. Bill Ritter signed into law House Bill 1261, which requires payday lenders to offer a no-fee, no-interest repayment for borrowers who have "rolled over" a payday loan four consecutive times. This law appears to address the legitimate concern that payday loans make it too easy for borrowers to get stuck in a spiral of debt they have trouble escaping.

We think the industry should be closely watched by state officials, and at least one provision in HB 1310 that lets borrowers repay their debt early without penalty is worthwhile.

But the bill goes too far, and could cut off access to an immediate source of credit for Coloradans whose alternatives are even worse.

Source:http://www.rockymountainnews.com/news/2008/mar/04/payday-loan-overkill/