In a new report, Payday Lending in America: Policy Solutions, Pew determined that Colorado's "new" payday loans are more affordable for borrowers, resulting in significant savings and the elimination of the constant churning of loans that trapped many borrowers in a cycle of debt.
The Bell Policy Center actively worked for several years to reform payday loans and was one of the leaders of the coalition that successfully pushed through legislation in 2010 (HB10-1351). The reforms reduced the fees on payday loans, extended the payback period to a minimum of six months, authorized installment payments, allowed early repayment without penalty and required all fees to be refunded on a pro-rated basis depending on how long the loan was outstanding.
Lower Fees for Borrowers
While still expensive, the "new" payday loans carry an annual percentage rate of 129 percent, compared to 318 percent under the old law. Pew calculated that, on average, borrowers in Colorado pay about 4 percent of their paychecks to service these loans. This compares to 36 percent in states with conventional payday loans that must be paid off in one lump sum, including fees, every two weeks.
As a result of these changes, borrowers are paying less in fees to lenders. We calculate that borrowers saved $40 million to $50 million in 2012 over what they paid in 2009 under the old law. (The range reflects differences in accounting for loans that are taken out in one year but paid off in the following year.)
As part of its study, Pew also conducted four focus groups with Colorado borrowers who have used the "new" payday loans. Many of the borrowers also used the old two-week, lump-sum payday loans.
"Stressful," "difficult," "does not work," "decimates my budget" is how borrowers described the old payday loans.
Conversely, they said the new loans are "doable," "manageable" and "easier." Borrowers also said the new loans "give me room to breathe" and "fit right in where I can pay other bills as well."
Colorado consumer credit counselors interviewed by Pew researchers said that the new loan structure has made it easier on borrowers. The counselors reported not "servicing clients with payday loan debt to the same extent" as they did before the new law.
Payday Lenders Remain in Colorado
Contrary to predictions from payday lenders and the law's critics, these changes have not caused the industry to shut down and leave the state. Granted, there has been a consolidation of the industry in Colorado, with the number of payday lending stores dropping from 505 at the end of 2009 to 238 in the middle of 2013. However, Coloradans still have access to this form of credit, and many payday lenders remain in business.
Pew calculated that in April 2010, about 82 percent of Colorado residents lived within five miles of a payday lender and 93 percent lived within 20 miles. In August 2013, 77 percent lived within five miles and 91 percent lived within 20 miles of a payday lender. Pew found that areas that used to have a large number of payday stores now have fewer and cited the example of one Denver ZIP code that had seven stores in 2010 but now has three.
Colorado Law Could Be National Model
Pew's major recommendation is that if a state does not currently allow traditional payday loans or other high-cost installment loans, it should not start. But for those that do allow them, Pew offers five policy recommendations to improve the payday loan product.
These recommendations are based in large part on what is working in Colorado and are specifically aimed at the 35 states that allow traditional payday loans and the federal Consumer Financial Protection Bureau (CFPB), which is charged with protecting consumers from defective financial products. Pew recommends that policy-makers:
1. Limit payments to an affordable percentage of a borrower's periodic income, which Pew estimates to be 5 percent of pretax income.
2. Spread costs evenly over the life of the loan and prevent front-loading of fees and interest on installment loans.
3. Guard against harmful repayment or collection practices.
4. Require concise disclosures that reflect both periodic and total costs.
5. Continue to set maximum allowable charges on loans for those with poor credit.
Pew is a highly respected research and policy organization, and it is gratifying that it has validated the reforms we worked so hard to get passed in Colorado. It not only found our approach to be working but has recommended that it serve as a model for other states and the CFPB.
We are truly grateful to the elected officials and all of our coalition partners that made these reforms possible. We can take pride in the fact that these reforms are helping a large number of hard-working, mostly low-income Coloradans.
– Rich Jones