Alternative Finances

Colorado’s Payday-Loan Experiment May Foreshadow Nationwide Changes

Colorado lawmakers, taking action against payday lenders, revised the state’s lending rules that, in 2010, extended loan terms to a minimum of six months. Short-term lending fell by more than 66 percent.

In 2014, the CFPB is considering nationwide rules that would nationalize the Colorado experiment – a laxer standard for heavy regulated states such as New York, but a big upgrade for states like Texas where payday lending standards are minimal.

“Overall, their (Colorado’s) experience may be pretty useful in foreshadowing what the market’s going to look like under CFPB’s rule,” said Alex Horowitz, a research manager at the Pew Charitable Trusts.

The legislation was a compromise measure after an effectively industry killing rate cap of 36%  hit a wall in the state Senate in  the Colorado 2010.

The number of payday loans made in-state fell from 1.57 million in 2009 to just 444,000 two years later. More than half of the state’s payday stores closed, though large national chains generally were able to adapt.

The new law stopped the extremely high interest two-week loan and allowed borrowers to pay off their debt in its entirety at any point within the 6 months term without a penalty.

“It’s still expensive, but people are able to pay them off,” said Rich Jones, director of policy and research at the Bell Policy Center, a Denver-based organization that supports the law.

The CFPB is barred by law from setting an interest-rate cap.  But adopting the Colrado standard, even in part, could be a feasible alternative to limiting payday lenders the CFPB could consider.

 

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