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Colorado voters have massively opted for stricter payday loan regulations, easily approving a proposal to cap interest rates on short-term loans.
Colorado is now the 16th state, plus the District of Columbia, to limit lending rates. “The 200% APR is gone. Huge win for Colorado consumers! ” tweeted Danny Katz, director of the Colorado Public Interest Research Group, Tuesday night.
Meanwhile, the federal government has started to reverse historic payday loan regulations. The opposing trends are a sign that strong consumer protections are increasingly left to states.
Short-term loans, often referred to as payday loans because they are due on the borrower’s next payday, have average interest rates of 129% in Colorado. At the national level, the tariffs mean between 150% and more than 600% per year. Initiative 126, approved by a 3-to-1 margin, caps these rates at 36%.
The Colorado crackdown comes as the new leadership of the Consumer Financial Protection Bureau (CFPB), which was created in response to predatory lending practices that led to the subprime mortgage crisis in 2007, overhauled regulations on the lending sector. Earlier this year, acting CFPB director Mick Mulvaney, President Trump’s budget manager, threatened to review a recent rule regulate payday lenders and car titles. More recently, the office has taken steps to weaken the Military Lending Act, which protects military families from high-interest loans.
At the congressional level, two bills this year proposed exempting certain types of payday lenders from state interest rate caps. The legislation would have allowed high-interest loans to be transferred to lenders in other states, even though the latter state has an interest rate cap. Neither bill got out of committee, but opponents fear they will reappear in 2019. If passed, they say, federal legislation would render the consumer protections in place at the consumer level unnecessary. State.
“States have always played a vital role and have been a battleground for consumer protection issues around payday loans,” said Diane Standaert, senior legislative advisor at the Center for Responsible Lending (CRL ). “This is even truer today in light of the setbacks happening at the federal level.”
Before election day, the breakdown industry had argued that lowering rates would hurt lenders’ profit margins and lead them to drastically reduce loan issuance. This, in turn, would encourage consumers who need money fast in the hands of lenders and unregulated online services.
But this argument turned out generally false in the experience of other states with price caps.
Nationally, states have tightened regulations on short-term lenders since the early 2000s, when research began to emerge that lending could be predatory and keep borrowers in a cycle of debt. It’s not uncommon for a loan of $ 300, for example, to be renewed multiple times and ultimately cost more than $ 800 in principal and interest, according to CRL. Repeat borrowing is called churn rates, and accounts for about two-thirds of the $ 2.6 billion in fees lenders charge each year.
Colorado first attempted to regulate payday loans in 2010 by reducing the cost of loans and extending the time borrowers could take to pay them off. This has helped bring down the average annual interest rates on payday loans out there. Corn research by CRL discovered that some lenders were finding ways around Colorado’s restrictions.
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