Colorado Could Be the 16th State to Place Interest Rate Cap on Payday Lenders

Inside Subprime: Sept 5, 2018

By Ben Moore

The past year has been a historic year for the payday loan industry, with the federal government doubling back on years of regulations on the industry. With the federal government appearing to overlook consumer protections, states are taking up the responsibility to ensure their citizens are protected from predatory lenders. The state of Colorado is looking to be the next in line with the state potentially introducing a state-mandated interest rate caps on loan lenders. Last week, the secretary of state introduced a ballot proposal called Initiative 126 which aims to cap payday lending APRs at 36 percent. If the proposal is passed, Colorado would be just the 16th state to crack down on payday lenders with a state-mandated interest rate cap. The initiative was submitted with over 185,000 signatures, well above the 98,492 signatures needed to secure a spot on the November ballot.

Colorado currently has a 129 percent average interest-rate on payday loans, which is still well below the national average of between 150 to 600 percent. But 129 percent is still exceedingly high, with many customers unable to pay back in full by the deadline, resulting in loan defaults. Initiative 126’s 36 percent APR cap would help mitigate loan defaults and offer more protection for borrowers in financial distress. Colorado has attempted to crack down on payday lenders in the past. In 2010, the state reduced costs of payday loans and allotted more time for borrowers to repay, which helped lower the average payday APR. But over time, payday lenders found loopholes to bypass the state through the encouragement of second payday loans when borrowers are unable to pay off the first in full. It is expected that an interest rate cap would discourage this practice. The proposal comes at a critical time for borrowers. Diane Standaert, senior legislative counsel for the Center for Responsible Lending, sees state-mandated regulations as crucial to the protection of borrowers, especially “in light of the rollbacks that are happening at the federal level.”

Throughout the past year, the Consumer Financial Protection Bureau, which was created in direct response to the lending practices that led to the 2007 subprime mortgage crisis, has spent the past year loosening restrictions on payday lenders. Current interim director, Mick Mulvaney, has led the bureau to waken the Military Lending Act (which was designed to protect military families from high-interest loans) and has threatened to revisit other rules introduced by the bureau which regulate payday lenders. There are now two proposals with Congress that have the potential to exempt certain types of payday lenders from interest rate caps. Initiative 126’s interest rate cap would protect Colorado’s borrowers from any changes Mulvaney is able to introduce.

The payday lending industry has not yet begun to campaign against Initiative 126, but the expectation is that the industry will claim the interest rate cap will hinder business profitability, causing lenders to offer fewer loans and subsequently drive borrowers to unregulated loan services. However, this has been proven untrue with most payday lenders.

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