Alternatives expected now that lenders are capped
Colorado voters, by the widest positive margin of any state ballot measure this year, agreed to cap the costs on payday loans at 36 percent a year, a rate some lenders argue is too low to stay in business but which backers argued was necessary.
“This lending product is so predatory,” said Corrine Fowler, who ran the successful campaign behind Proposition 111. “Financially, people are not better off when taking the loans. It’s just immoral, unjust and wrong.”
Costs, including fees and interest for those shortterm loans of $500 or less, averaged around 129 percent and could reach above 200 percent. And that was after major reforms in 2010 took them down from more than 500 percent of the original amount.
Colorado consumers are expected to save $50 million a year in borrowing costs. But will they be able to get a short-term loan once the measure takes effect Feb. 1?
A Federal Reserve survey in May found that 40 percent of adults said they couldn’t cover an unexpected expense of $400 or more in cash. Payday loans, while onerous and even usurious, did meet short-term needs, including covering the mortgage or rent, auto loan payments and utility bills.
Research on how borrowers responded in the 15 states that passed caps found that they fell back on strategies used before payday loans were available or the ones they turned to when they finally paid off their payday loans, said Rich Jones, director of policy and research at the Bell Policy Center in Denver, a key member of the broad coalition that supported 111.
They turned to family and friends for help, they sold or pawned items, and they negotiated with creditors, he said.
“Many of the borrowers reported they were better off without the payday loans,” Jones said.
Jones likened it to weeding a garden. The bad plants need to be pulled out to make room for the good ones, and he and Fowler expect the marketplace to come up with some alternatives.
Part of the difficulty banks and credit unions face, unlike payday lenders, is that they need to have a reasonable assumption borrowers can repay a loan before it is made to them.
Traditional lenders would like to make more small-dollar personal loans, but federal regulations need to change to make that possible, said Amanda Averch, a spokeswoman with the Colorado Bankers Association.
“There is a lot of work to be done. The OCC is the only regulator that has backed off on those standards, but the FDIC and Federal Reserve have yet to rule,” she said.
When the Office of the Comptroller of the Currency eased back on 2013 guidelines, it opened a door for direct-deposit advance products at banks under its watch. U.S. Bank, the state’s second largest, claims to be the first to step into that void with a recently released small-dollar loan product called Simple Loan.
The loans run from $100 to $1,000 and are paid off over the following three months via the direct deposits employers make into a borrower’s account. After borrowers pay one loan off, they need to wait another month to borrow again.
Credit unions, especially community development credit unions, are expected to backfill as well, and so are more employers via programs that offer pay advances as an employee benefit.
Even, a financial technology company based in San Francisco, teamed with Walmart in December to provide the retail giant’s 1.3 million workers the ability to take an advance on their pay via a mobile application up to 13 days before payday. About 300,000 workers have the app.
Calls to the Community Financial Services Association of American, the trade group representing payday lenders, were not returned. Opponents of the measure kept a low profile during the campaign and continued to do so after it passed.
When voters in the state took the ceiling on maximum cost of payday loans down from more than 500 percent to just over 200 percent in 2010, payday lending locations fell by nearly a fifth and the number of loans dropped by 29 percent in the following year, according to counts from then Colorado Attorney General John Suthers.