Colorado voters, by the widest positive margin of all state voting measures this year, agreed to cap payday loan costs at 36% per annum, a rate some lenders deem too low to stay in business, but lenders have deemed necessary.
“This loan product is so predatory,” said Corrine Fowler, who successfully led the campaign behind Proposition 111. “Financially, people are no better off when they take out loans. It’s just immoral, unfair and wrong.
The costs, including fees and interest for these short-term loans of $ 500 or less, averaged around 129% and could reach over 200%. And that was after major reforms in 2010 removed them by more than 500 percent of the original amount.
Colorado consumers are expected to save $ 50 million per year in borrowing costs. But will they be able to get a short-term loan once the measure comes into effect on February 1?
A Federal Reserve investigation in May found that 40% of adults said they couldn’t cover an unexpected expense of $ 400 or more in liquid. Payday loans, while expensive and even usurious, met short-term needs such as mortgage or rent, auto loan payments, and utility bills.
Research on how borrowers reacted in the 15 states that adopted caps found that they fell back on the strategies used before payday loans were available or on those they turned to when they did. ‘they eventually 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, sold or pawned items and negotiated with creditors, he said.
“A lot of borrowers have said they were better off without payday loans,” Jones said.
Jones compared it to weeding a garden. Bad plants have to be pulled out to make room for the good ones, and he and Fowler expect the market to come up with alternatives.
Unlike payday lenders, banks and credit unions are faced in part with having to have a reasonable assumption that borrowers can repay a loan before it is granted to them.
Traditional lenders would like to make more small personal loans, but federal regulations must change to make that possible, said Amanda Averch, spokesperson for the Colorado Bankers Association.
“There is a lot of work to be done. The OCC is the only regulator that has backed down on these standards, but the FDIC and Federal Reserve have yet to rule, ”she said.
When the Office of the Comptroller of the Currency relaxed the 2013 guidelines, it opened the door to direct deposit products at banks under its oversight. US Bank, the second largest in the state, claims to be the first to enter this void with a recently launched low dollar loan product called Simple Loan.
Loans range from $ 100 to $ 1,000 and are repaid over the next three months via direct deposits made by employers into a borrower’s account. After borrowers have paid off a loan, they have to wait another month to borrow again.
Credit unions, especially community development credit unions, are also expected to replace, along with more employers through programs that offer salary advances as a benefit.
Even, a San Francisco-based fintech company, partnered with Walmart in December to give the retail giant’s 1.3 million workers the option of taking a paycheck advance through a mobile app. ’13 days before payday. About 300,000 workers have the app.
Calls to the Community Financial Services Association of America, 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 was passed.
When state voters lowered the cap on the maximum cost of payday loans from over 500% to just over 200% in 2010, the lending places fell by almost a fifth and the number of loans fell by 29% the following year, according to Colorado Attorney General John Suthers.