May 03, 2011 11:46 PM UTC

We don't need no stinkin' 'fix' on payday loans

• 6 Comments
• by: TheBell

(And stop spamming us! – promoted by Colorado Pols)

Memo to legislators: Last year’s payday lending reforms are working. They’re not broken. No need to fix them.

It’s worth mentioning because payday lenders are back at the Capitol, looking to undo last year’s work with a “technical fix.”

The showdown is Thursday morning, when HB 1290 will go before the Senate Local Government and Energy Committee.

Last year, the Colorado legislature reformed payday lending in Colorado. It was one of the major achievements of the 2010 session, and borrowers are better off today because lawmakers cast an important vote for consumer protection.

This year’s bill, introduced on behalf of the payday lending industry, proposes a “technical fix,” but there’s nothing technical about it. The intent is to remove a central provision in last year’s reforms.

This so-called fix would make the origination fee on loans non-refundable. Currently, all the fees are refunded on a pro-rated basis if a loan is paid off early. Under the proposed change, the lenders keep the full origination fee no matter when the loan was paid off. This would increase the cost of a loan paid off in 30 days by $50 and boost the APR from 86 percent to 289 percent.

The proposed change would provide a strong financial incentive for lenders to churn loans by enticing borrowers to pay off one loan so that a new one, with a new round of fees, can take its place. This would be a step backward for consumer protection in Colorado – a return of the debt trap.

The current reforms were fully implemented in the fall, and we have only limited data on their  effects. However, preliminary feedback from borrowers indicate that the loans are more affordable.

This change in law helped consumers without driving the payday lending industry out of Colorado. There are about 350 payday lenders operating in Colorado. In fact, the chief executive of EZ Pawn, a publicly traded payday lender with 40 stores in Colorado, summarized the impact of last year’s reforms for investors by saying: “We’re about two and a half months into that product and we are frankly happy, very happy with what is going on there. Our loan balances are where we expected them to be and our bad debt is actually slightly better than where we expected it to be.”

We think that says it all: No fix needed.