The Colorado state legislature voted against jobs in Colorado when they passed HB 1351. (Photo: Flickr)

Various state legislatures have passed tough payday loans regulation in recent months, and now Colorado HB 1351 has made it through after a narrow vote. According to Progressive States Network, HB 1351 caps APR at 45 percent and requires that lenders give borrowers as long as six months to pay back the money borrowed.  Because payday loans are commonly a two-week short term loan, the interest a lender would gain from extending a loan at an annual interest of 45 percent would amount to not much more than the $4.14 a lender charging a 36 percent APR would receive. Thirty-six percent is a common cap that many states have placed on payday lending, and it isn’t feasible for payday lenders. The only way Colorado lenders could even begin to cover their own costs would be the leeway to charge a $75 origination fee and monthly fees of up to $30 in excess of interest, according to Progressive States.

Who cried no on HB 1351

Colorado Financial Service Centers Association and the Community Financial Service Association (CFSA) said HB 1351 is bad for jobs and the economy. In a TV spot, the organizations cited examples of how recent tax hikes and regulations in Colorado have cost the state jobs (such as 5,000 Amazon.com jobs that were lost). They claimed that HB 1351 would cost the state 1,600 jobs out of the payday loans industry alone. Not only that, but the legislation that the Boulder Daily Camera called “a terrible bill” in February is supported by some groups that would appear to be “targets” of the payday loans industry, if the rhetoric of the Center for Responsible Lending is to be believed. The groups include C3 – Colorado Competitive Council, the Hispanic Contractors of Colorado, Society of Hispanic Human Resource Professionals and Urban League of Metro Denver, among others.

Wall Street madness caused the financial meltdown

Yet pseudo-watchdog organizations with deep pockets claim that payday loans are to blame, particularly because of a consumer’s ability to roll over loans. What the vast majority of such criticism glosses over is the fact that not only do the most visible payday loans companies nationwide either prohibit or severely limit rollovers, the CFSA makes a point of working with the vast majority of lenders who do put consumer protections of this sort in place. Consumers don’t need Colorado HB-1351, Oregon’s SB 993, Illinois’ HB 537, Ohio’s HB209, New Hampshire’s SB 193 or Iowa’s HF 2127, to name a few. Consumers prefer having the choice, rather than having sole options dictated to them in a nanny state atmosphere.

(Photo Credit: http://www.flickr.com/photos/yosoynuts/ / CC BY-ND 2.0)

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After the first round of regulation was passed, more than 700 Ohio payday loan stores closed. Image from Flickr.

In 2008, Ohio passed a comprehensive payday lending reform law, HB 545. This law capped the interest rates lenders could charge for payday cash advances. Two years after this law went into effect, Representatives Jennifer Garrison, Gerald Stebelton and Matt Lundy are co-sponsoring HB 486, intended to further limit payday lenders.

The argument for more payday loan regulation through HB 486

Ohio’s HB 486 is being introduced under the auspice of more regulation for the payday lending industry. Many lawmakers are frustrated that payday lending stores are charging fees for services such as check cashing, loan origination and credit checks. When HB 545 passed in 2008, the goal was to reduce the cost of payday loans and more heavily regulate the industry. HB 486 is designed to tighten regulations even more. Legislators are concerned that payday lending customers are paying, in effect, $15 – $25 on each $100 borrowed for a two or four week period. Some borrowers misuse this service and end up digging themselves deeper into debt.

The argument against more regulation on payday loans

While the payday lending industry is not often well received or well liked, HB 486 attempts to punish payday lenders for following the law. When HB 545 was passed, interest rates on payday loans were capped at 28 percent annual interest — about that of most credit cards. However, over the two-week period of most payday loans, that interest rate does not provide the income lenders need to cover their costs. More than 700 payday lending stores closed, and 2,500 Ohio residents lost their jobs.

Ohio lenders operating under the Small Loans Act

In an attempt to remain open, Ohio payday lenders began operating under the Small Loans Act. The Small Loans Act allows lenders to charge fees for check cashing, credit checks and loan origination. The Small Loans Act also requires increased reporting, cash-on-hand and more regulated advertising. The payday lending stores in Ohio that began charging fees and operating under the Small Loans Act have followed the letter of the law, ensuring that they are providing a legal service. HB 486 seeks to end this practice.

The math of payday loans in Ohio

Many legislators are pointing to figures such as 391 percent APR to explain why they believe payday lenders need more regulation. However, neither HB 545 or HB 486 take into account that payday loans are intended as short-term financial solutions for between two and four weeks. Additionally, the only other option available to most payday loan customers are bank fees of $30 or more for bounced checks. Many payday loan customers have credit that does not qualify them for more traditional financial products.

So what do you think? Will HB 486 protect consumers? Or will HB 486 put Ohio payday lenders out of business?