November 06, 2009 03:02 AM UTC

Attorney General Releases New Payday Lending Data - Consumers Still Screwed

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• by: TheBell

(Ink by the barrel, payday loan spammers – promoted by Colorado Pols)

Today, the Colorado Attorney General’s office released its annual report of state payday lending activities.  The report, which provides data for 2008, shows that although the overall number of payday loans and total amount borrowed decreased from 2007 to 2008, payday lenders are still profiting at the expense of Colorado consumers.  

In 2008, the average payday loan grew by $7 and the average APR for each loan increased to more than 318 percent.  Payday lenders often justify their excessive rates by claiming that they provide high risk loans.  But the facts prove otherwise.  Although consumers defaulted on 10 percent of payday loans in 2008, payday lenders aggressively limited their losses through the collections process.  The actual charge off rate for payday lenders in 2008 was just 4.3 percent of the amount financed, a rate comparable to the 5.5 percent average charge off rate on credit cards in 2008.  It’s lower than the charge off rate for 2007.

The data also indicate that payday loans are not a one-time only product.  Many borrowers use multiple payday loans each year and more than 31 percent of all payday loans are simply renewed.  In 2008, the Attorney General also reported that 36 percent of all payday loans were made the same day as loan payoffs.  By combining the data it’s fair to conclude that more than two-thirds of all payday loans in Colorado are rollover or refinance type loans.   This confirms a study released earlier this year by the Center for Responsible Lending that found that payday loans essentially create their own demand.  It is important to note that the Colorado statistics only measure borrowers at a single location and don’t account for those that use multiple lenders.  The number of repeat borrowers is actually much higher than reported.

The most important information contained in the Attorney General report relates to use of the payment plan option.  State lawmakers enacted a provision in 2007 that requires lenders to offer information about a payment plan after the borrower’s fourth consecutive loan.  Last year was the first full year to measure the effect of the new law.  The result was predictable.  Similar to the experiences in other states with payment plans, very few borrowers use them.  More than 70 percent of lenders reported using tactics such as cooling off periods, threatened loan limits and cash only repayment requirements, to discourage borrowers from using payment plans.  Although nearly one-third of all payday loans made in 2008 required payment plan notice, fewer than 7 percent were converted to payment plans.  Only 4.8 percent of payday loans were successfully completed through payment plan agreements.

The payment plan failure makes one thing obvious.  Payment plans are not a solution that helps borrowers leave the payday cycle of debt.   Clearly, they are merely an industry distraction intended to forestall more rigorous regulation.  Much more is needed to protect Colorado consumers from this usurious and harmful product.