3 Sept. 2010
The Colorado attorney general's office adopted new rules for payday loans Tuesday that further protect consumers. It was another step toward fairness for the state's most vulnerable borrowers.
The new rules came in response to House Bill 1351, passed this last spring by the state Legislature. The attorney general's rules lay out how that legislation will be enforced and give specifics to areas outlined in the bill.
The decision about the rules was made by Laura Udis, who works for the attorney general as administrator of the Colorado Uniform Consumer Credit Code. She arrived at her decision in consultation with the nine-member Council of Advisors on Consumer Credit. The rules will take effect Nov. 29 and must be approved by the Legislature in 2011.
Central to the rule-making is a clarification about fees charged for payday loans. Before HB 1351, the typical payday loan was for less than $500 and had high fees and a two-week repayment cycle.
That encouraged borrowers to refinance their loans frequently and repeatedly, with high interest rates and new fees for each "new" loan. The danger is that borrowers become trapped in a never-ending cycle of interest payments and fees without ever paying off the original loan amount. Critics would say the entire industry was structured along those lines and that little differentiated it from illegal loansharking.
HB 1351 eliminated the two-week cycle and instead mandated a minimum term of six months. It also specified that borrowers can pay off such loans early without incurring ruinous penalties.
The bill, however, left many of the details unclear. Critics and supporters alike agreed that the legislation, hastily rewritten right before its passage, contained contradictory and confusing language.
The new rules sought to clarify and define how lenders can handle those details, in particular loan fees. Payday loans typically come with origination fees of as much as $75. The industry had wanted to be able to keep the entire fee in the event the loan was paid off early.
Instead, the new rules require some of the fees to be refunded if the loan is paid off early. The idea is to prevent the practice of encouraging borrowers to pay off old loans by taking out a new loan - with new fees.
The attorney general's office had been criticized by consumer advocates when a draft of the new rules was released last month. Critics said they were skewed in favor of the industry and offered borrowers too little protection.
The rules announced Tuesday met no such hostility. On the contrary, consumer groups praised them as a move toward leveling the playing field for consumers of disparate means. Their case is simply that poor borrowers should be treated as fairly as wealthy ones.
And it is hard to fault that thinking. Well-to-do people always will have an easier time dealing with lenders, credit agencies and financial institutions of all sorts. That is life. But that is also no reason to allow some lenders to treat the most desperate - and often least sophisticated - borrowers unfairly or in ways that border on dishonesty.
Short-term loans to poorly qualified borrowers will naturally come with higher interest rates than, for example, a 30-year mortgage for a home buyer with a stellar credit history. But then so do credit card purchases made by that same homeowner. Again, none of that is reason to allow unfair practices.
Payday loans are at best a risky tool for difficult circumstances. They should not be a way of life. The state's efforts to rein in such lending is healthy. Colorado consumers will be the better for it.
source:durangoherald.com
