Payday Lending Abuses Reined In, As Colorado Joins Other States in Reform

The payday lending trap has been shorting working families to the tune of nearly $5 billion per year ever since the industry exploded onto the scene in the 1990’s.  The number of payday lending institutions has jumped exponentially from 500 in 1990 to about 22,000 today (compared with 14,000 McDonald's), mainly targeting low-income African American and Latino communities. 

But two weeks ago, Colorado enacted payday industry reforms, squeaking by with a one-vote margin in the Colorado House.  Though lenders can still charge a $75 origination fee as well as monthly fees of up to $30 on top of interest, the bill addresses cycles of debt by capping APR interest rates at 45% and mandating that borrowers be given as long as six months to pay back loans. 

Colorado’s joins sixteen other states and the District of Columbia which have already passed limits on interest rates for short-term loans, ranging from 17 percent to 60 percent. 

Beyond Capping Interest Rates:  A number of other reforms have been enacted or proposed in other states to prevent workers being bled dry by payday loans, including:

  • Oregon approved SB 993, which toughened existing predatory lending regulations by requiring any lender that derives more than 10% of its business from payday loans to acquire a license from the Dept. of Consumer and Business Services to conduct business, on top of the licenses already required by state and local law.  The new law also creates new notice, reporting, and regulatory compliance requirements for payday lenders, the non-compliance of which can result in fines and other penalties.
  • IllinoisHB 537 caps the APR on payday loans to 99%, indexes the loans based on the borrower’s ability to pay, and would require loans to be paid off in equal monthly installments with no balloon payments.  After passing the House in April, it cleared the Senate in May and is waiting for a concurrence vote in the House.
  • The Ohio House passed HB209, which limits fees charged by payday lenders.  Though Ohio already caps APRs at 28%, the fees were a way for lenders to get around regulations.  Though it faces a tough battle in the Senate, Gov. Ted Strickland supports the legislation.
  • SB 193 passed both houses of the New Hampshire legislature, and establishes a 36% APR cap on all small loans under $10,000, including payday loans.
  • Though Iowa’s HF 2127, which would give payday lenders the option of capping the APR for loans at 36% or limiting the number of loans per borrower at six per year, was one vote short of moving out of a subcommittee, momentum is building.  After 60 members of the Iowa Citizens for Community Improvement managed to shut down the operations of an Ace Cash Express in Des Moines in December 2009, Des Moines City Council members voted unanimously on May 13, 2010, to a six-month moratorium on new payday loan stores in the city.

Unfortunately, two states passed weaker legislation designed to appease the payday lending industry, throwing consumers under the proverbial bus in the process.  Utah and Wisconsin both caved to threats that the industry would shed jobs with further regulation, approving bills that stopped short of requiring much-needed limits on interest rates.

Stopping Steps Backward:  Advocates are also working to defeat legislation in CaliforniaAB 377, that would be a huge step backward, increases the maximum payday loan amount from $300 to $500 and allows lenders to charge consumers an APR as high as 459% for a two week loan.  It would also establish de facto legalization of internet payday lending. It passed the Assembly in May 2009 and is awaiting a hearing in the Senate Judiciary Committee.  

See the Center for Responsible Lending for more of the latest news on payday lending reform here.  For a useful infographic on how payday lending works, visit The Consumerist.

Center for Responsible Lending - Pay Day Lending
Coloradans for Payday Lending Reform
Consumer Federation of California, “CFC Opposes AB 377 (Mendoza) — Pro Payday Lenders, Anti Borrower”
Consumerist - How Predatory Lending Works, From Payday Loans To Rent-To-Own