Al­ter­na­tives ex­pected now that lenders are capped

The Denver Post - - BUSINESS - By Aldo Svaldi and Joe Ru­bino

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.

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.