Colorado voters have overwhelminglyopted for tighter regulations on payday lending, easily approving a proposal to cap interest rates on the short-term loans.
Colorado is now the 16th state, plus the District of Columbia, to limit loan rates. “APRs of 200% are gone. Huge win for Colorado consumers!” tweeted Danny Katz, the director of the Colorado Public Interest Research Group on Tuesday night.
Meanwhile, the federal government has started walking back historic regulations on payday lending. The opposing trends are a sign that strong consumer protections are increasingly being left to the states.
Short-term loans, often called payday loans because they’re due on the borrower’s next payday, have average interest rates of 129 percent in Colorado. Nationally, rates average between 150 percent and more than 600 percent a year. Initiative 126, approved by a 3-to-1 margin, caps those rates at 36 percent.
Colorado’s crack down comes as new leadership at the Consumer Financial Protection Bureau (CFPB), which was created in response to the predatory lending practices that led to the 2007 subprime mortgage crisis, has been dialing back regulations on the lending industry. Earlier this year, CFPB Interim Director Mick Mulvaney, President Trump’s budget director, threatened to revisit a recent rule regulating payday and car title lenders. More recently, the bureau has taken steps to weaken the Military Lending Act, which protects military families from high-interest-rate loans.
At the congressional level, two bills this year proposed exempting some types of payday lenders from state interest rate caps. The legislation would have allowed high-interest-rate loans to be transferred to lenders in other states, even if the latter state has an interest rate cap. Neither bill made it out of committee, but opponents worry that they’ll pop up again in 2019. If passed, they say, the federal legislation would make consumer protections in place at the state level irrelevant.
“States have always played a critical role and been a battleground for consumer protection issues regarding payday loans,” Diane Standaert, senior legislative counsel for the advocacy group Center for Responsible Lending (CRL), said in August. “That’s even more true today in light of the rollbacks that are happening at the federal level.”
Leading up to Election Day, the payday industry had argued that lowering rates would hurt lenders' profit margins and cause them to significantly curtail loan issuance. That, in turn, would drive consumers who need quick cash into the hands of unregulated online lenders and services.
But that argument has proven to be generally untrue in the experience of other states with rate caps.
Nationally, states have been stepping up regulations on short-term lenders since the early 2000s when research began to emerge that the loans could be predatory and keep borrowers in a cycle of debt. It’s not unusual for a $300 loan, for example, to be rolled over many times and ultimately cost more than $800 in principal and interest, according to the CRL. The repeat borrowing is called loan churn and accounts for roughly two-thirds of the $2.6 billion in fees that lenders charge each year.
Colorado first tried to regulate payday lending in 2010 when it reduced the cost of the loans and extended the length of time borrowers could take to repay them. That helped bring down average payday loan annual interest rates there. But research by CRL has found that some lenders were finding ways to work around Colorado’s restrictions.
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