Prop. 111 looks to limit predatory payday loans, but critics say it could  limit some businesses

DENVER — A statewide ballot item looking to limit the amount of interest and fees that payday lenders can charge has no political opposition — but executives in the industry say it could prevent them from providing their service.

Proposition 111 — the Limits on Payday Loan Charges Initiative — would reduce the interest rate on short-term loans to a yearly rate of 36 percent and eliminate any other fees and charges on payday lending. Currently, the maximum charges allowed to payday loans are a charge of up to 20 percent on the first $300 loaned, a charge of 7.5 percent for any amount loaned above $300, a monthly maintenance fee of up to $30 per month and an additional annual interest rate of 45 percent. Under the current law, lenders can charge up to 200 percent interest on small loans – payday loans are short-term loans up to $500.

In 2016, the average payday loan was $392 and cost customers and an average of $119 in interest and fares, reports Yes on Prop 111, an organization backing the measure. There were more than 414,000 payday loans that year that cost about $50 million in fees and interest.

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The cap of a 36 percent annual percentage rate, including fees, would make payday loans subject to the same top interest rate allowed for most other loans in Colorado.

“These loans are extensive and a burden for a lot of low-income Coloradans who need a couple bucks from time to time,” said Rich Jones, director of policy and research for the Bell Policy Center, a nonpartisan nonprofit organization that is one of the groups supporting Prop. 111. “These loans are expensive to them, and in many cases, people get into a cycle of debt where they have to take out additional loans to pay off the loans they have.”

The state would not be the only one to have this cap. New Hampshire,  Montana South Dakota and North Carolina have caps of 36 percent. Arkansas is capped at 17 percent, New York at 25 percent and New Jersey at 30 percent. It’s not authorized in several other states, including Georgia, Massachusetts, Pennsylvania and several other states. Jones added that it’s notable that Western states such as Montana, South Dakota and Arizona have passed similar legislation to what Colorado is trying to do.

Payday loans have been capped nationally, too: The interest rate on payday loans to active-duty military and their families was capped at 36 percent about 10 years ago. However, veterans and retirees are still able to be charged with fees and rates far beyond 36 percent.

Prop. 111 is backed with support on both sides of the aisle, including the Colorado Democratic Party, many local veterans and military groups, union groups and faith groups, including the Greater Metro Denver Ministerial Alliance. There has not been much organized opposition to the ballot measure.

That is not to say it is without its opposition. Most notably, payday lenders are against Prop. 111, from large organizations such as Ace Cash Express to smaller local lenders.

“The proposed changes would reduce revenues substantially,” Paul Stratch, a controller with Denver-based Loan Stop, told BizWest in an emailed statement. “Anytime that happens in any business, that business is forced to restructure, if not pull out of the state altogether, or completely shut down operations. This would mean a loss of many jobs.”

Stratch said proponents of the measure make the argument that if banks can operate at a certain interest rate, short-term lenders should be able to as well. But Stratch said this ignores the fact that banks have other sources of revenue — long-term loans, home loans, mortgages, auto loans, checkings and savings accounts — that short-term lenders don’t have.

But perhaps most important is what limiting these loans can mean to customers who rely on them, especially if short-term lenders stop lending altogether because of the new regulation.

“We loan to many, many satisfied customers.  Many of these people cannot get the money they need someplace else, or they don’t want to,” Stratch said. “In many cases, their banks are not willing to help them, for whatever reason.  So if short-term lenders go out of business or leave the state, there will be literally thousands of customers with nowhere to turn when they need help.”

There are other critiques as well. Jon Caldara, president of the Independence Institute, calls the measure insulting.

“What you’re saying is that poor people are stupid, and we need to protect them from their own bad decisions by taking away a financial option they have,” he told BizWest. “If you don’t like payday loans, don’t get one. If you think people are being taken advantage of, instead of outlawing them, give them a different option. The fact that there are no other options shows how risky it is.”

Jones admits that Prop. 111 does not provide a solution or another option beyond payday loans. But limiting these loans does spur alternatives, he said. There are credit unions that will provide loans to low- and moderate-income clientele who might not have the credit scores to get more-traditional loans. Faith-based organizations will often offer emergency loans as well. There’s evidence in states that have capped payday loans, such as Montana, that there are alternatives coming onto the market. Employers are looking at more easily advancing people’s wages, looking at a larger picture beyond credit score but also considering their work history and reliability.

“This is like weeding the garden,” Jones said. “We’re getting rid of some of the bad products out there to make room for better products to grow and we need to work at encouraging other people to offer products and alternatives that are fairer and cheaper.”