Payday lenders

Payday lenders
Make the state's lawsuit the start of wider reform

July 19, 2001

Colorado Attorney General Ken Salazar has filed suit against a chain of check-cashing stores accused of overcharging its customers. It is unfortunate he cannot do more, but for that he would need the help of the Legislature.

The narrow issue is whether Texas-based ACE Cash Express Inc. broke the law covering so-called payday lending. The broader concern is whether payday lending is a practice that should be permitted at all. Preying on the weakest members of society is not something the state should encourage.

Payday lending consists of advancing cash, for a fee, against post-dated checks that the lender then holds for up to 14 days — until the next payday — before cashing. The problem is that, according to The Associated Press, the fees and surcharges ACE tacks on can amount to a 442 percent annual percentage rate.

Under a law passed last year payday lenders must be licensed and loans are limited to a maximum of $500. They are allowed to charge no more than 20 percent of the loan amount on the first $300 and 7.5 percent thereafter.

For a two-week loan of $500 that works out to $75. Lenders are legally allowed to roll the loan over once at the same $75 rate. If they continue the loan after that they are required to charge lower rates.

The state says ACE kept renewing 14-day loans at the initial rate, and in violation of the law. In addition, the suit says that ACE is illegally operating without the required license.

The company gave up its supervised lender’s license in December. It maintains that because it is partnered with a California bank, it does not need a license.

"ACE is not a bank," says Salazar. "These are financial institutions trying to obtain the protection of federal banking law by associating themselves with a national bank."

No doubt most banks would be eager to dissociate themselves. From a societal point of view, payday lending is little more than legalized loan sharking. Even at legal rates, a borrower with a $500, 14-day payday loan will pay an annual percentage rate of 391 percent. Only someone desperate or financially ignorant would agree to that.

The state would do better to ban payday lending altogether. It could then look for ways to enlist real banks in an effort first to educate and then to serve the basic financial needs of poor and transient populations.