Small Loans - Big Money

4/19/2001

Executive Summary

The Colorado Public Interest Research Group (CoPIRG), the Consumer Federation of America (CFA), and other consumer protection groups have documented the effect of financial deregulation on American consumers throughout the 1990's. One consequence of deregulation of interest rates, high credit card interest rates and high bank fees has been the rapid growth of the so-called fringe banking industry, which includes check cashing outlets, payday loan companies, rent-to-own stores, high cost second mortgage companies, sub-prime auto lenders, traditional pawn shops and the growing business of auto title pawn companies. This report examines payday lending in Colorado following the passage of the Colorado Deferred Deposit Loan Act which authorized payday lending in Colorado and attempted to set up protections for consumers seeking payday loans.

Last year the Colorado General Assembly authorized payday lending with the passage of The Colorado Deferred Deposit Loan Act (DDLA). Deferred deposit loans are also called payday loans, they are small loans usually based on a personal check held for deposit, or authority to directly debit the loan applicants checking account. The loans are small but the Annual Percentage Rate can be as high as 871%1 in some states. The DDLA was adopted as an article in the Uniform Consumer Credit Code (UCCC), and took effect on July 1, 2000. In 1992 the UCCC administrator determined that payday loans or deferred deposit loans were supervised loans subject to the UCCC. The debate in Colorado was only one of the ongoing debates surrounding payday loans in states across the country. The passage of the DDLA created a sub-category of lending and the regulations that apply to it; essentially authorizing payday loans explicitly and attempted to set limits to protect consumers.

This report provides background on the industry nation-wide, a brief update on the status of payday loan legislation in states across the country, and a survey of 30 payday lenders in Colorado. The survey findings show that the DDLA has not increased protections for consumers when taking out a payday loan. Payday lenders in Colorado continue to make short-term loans of $100-$500 at legal interest rates of between 182%-520%. The survey also shows that the national trend of payday lenders exploiting new partnerships with national banks to export the deregulated laws of the banks state of incorporation has found its way to Colorado. ACE Cash Express who claims to provide small loans as a service of the Goleta National Bank boldly states that it allows three (3) rollovers when DDLA explicitly prohibits more than one (1) rollover of a payday loan. The survey also shows that fee disclosure's required by the DDLA are insufficient in alerting consumers prior to completing a loan transaction to the pitfalls and high fees of a payday loan.