Colorado Payday Loan Legislation

As you may have picked up in the past, I am not a big fan of predatory loans that charge 400% APY. The only companies that do this are in the infamous payday loan and check cashing industry.

In my native Colorado, things might get a little bit better on this front. The legislation is far from perfect and does not do enough to protect consumers, in my opinion, but it is a start and brings attention to an important issue.

House Bill 1351, sponsored by Rep. Mark Ferrandino, D-Denver, would limit the amount of interest that payday lenders can make off of loans. It was approved on a 7-4 vote by the House Judiciary Committee, with Democrats backing it and Republicans opposing it, and is headed next for debate on the House floor.

Under current law, payday lenders can charge a finance charge of $20 per $100 on the first $300 loaned and $7.50 per hundred dollars after that until the loan has reached its maximum $500 limit. The average payday loan in 2008 was $391, with an average annual interest rate of 317 percent, according to the nonpartisan Colorado Legislative Council.

HB 1351 originally proposed capping the annual percentage rate on each loan at 36 percent. However, Ferrandino amended the bill Thursday to increase that number to 45 percent APR and added a provision allowing a loan-origination fee of $10 per $100 lent for the first loan made to a person in any 12-month period.

The changes came after payday lenders, who made more than $566 million in loans in 2008, complained that the reduction in profits they would be able to make would shut down many of their businesses and put thousands of people out of work during an economic downturn. A number of Democrats have spoken against the potential effects of the bill as well.

Under current law, Ferrandino argued, lenders can make $75 off of a two-week loan, while his new bill would reduce that amount to $58.63, much higher than the $6.90 they could have made under the original HB 1351. The goal of his bill, he said, is to stop lenders from making large amounts off of future loans that keep borrowers in a perpetual cycle of debt.

Read the entire article at the Denver Business Journal. Do you think payday loans are a bad thing? Are they needed at all? Should they be allowed, but at more reasonable rates? Please give your thoughts in the comments.