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					                  Small Loans - BIG                         $Money$:
                       A Survey of Payday Lenders in Colorado
                                  And Review of the
                      Colorado Deferred Deposit Loan Act of 2000
                                               April 2001

                                    By Emily Hoopes
                Consumer Advocate, Colorado Public Interest Research Group

Special Thanks To:

Ed Mierzwinski, State Public Interest Research Groups, Consumer Program Director

Jean Ann Fox, Consumer Federation of America, Director of Consumer Protection

Additional copies of this report are available for $15 by sending a check made payable to:

                                      Colorado Public Interest Research Group
                                            1530 Blake Street, Suite 220
                                                Denver, CO 80202
                                                  (303) 573-7474
                                     General Email Inquiries:

Consumer fact sheets are posted on CoPIRG's website at
                                 T able of C ontents:

I. Executive Summary                                    3

II. Introduction                                        4

III. Industry Growth                                    6

IV. State Usury Laws                                    6

V. Payday Loan Legislation                              6

VI. National Banks and Thrifts                          6

VII. Colorado Deferred Deposit Loan Act                 7

VIII. Survey Results                                    7

IX. Recommendations                                     8

X. Conclusion                                           9

I. Executive Summary:
        The Colorado Public Interest Research Group (CoPIRG), the Consumer Federation of
America (CFA), and other consumer protection groups have documented the effect of financial
deregulation on American consumers throughout the 1990's. One consequence of deregulation
of interest rates, high credit card interest rates and high bank fees has been the rapid growth of
the so-called fringe banking industry, which includes check cashing outlets, payday loan
companies, rent-to-own stores, high cost second mortgage companies, sub-prime auto lenders,
traditional pawn shops and the growing business of auto title pawn companies. This report
examines payday lending in Colorado following the passage of the Colorado Deferred Deposit
Loan Act which authorized payday lending in Colorado and attempted to set up protections for
consumers seeking payday loans.

         Last year the Colorado General Assembly authorized payday lending with the passage of
The Colorado Deferred Deposit Loan Act (DDLA). Deferred deposit loans are also called
payday loans, they are small loans usually based on a personal check held for deposit, or
authority to directly debit the loan applicants checking account. The loans are small but the
Annual Percentage Rate can be as high as 871%1 in some states. The DDLA was adopted as an
article in the Uniform Consumer Credit Code (UCCC), and took effect on July 1, 2000. In 1992
the UCCC administrator determined that payday loans or deferred deposit loans were supervised
loans subject to the UCCC. The debate in Colorado was only one of the ongoing debates
surrounding payday loans in states across the country. The passage of the DDLA created a sub-
category of lending and the regulations that apply to it; essentially authorizing payday loans
explicitly and attempted to set limits to protect consumers.

         This report provides background on the industry nation-wide, a brief update on the status
of payday loan legislation in states across the country, and a survey of 30 payday lenders in
Colorado. The survey findings show that the DDLA has not increased protections for consumers
when taking out a payday loan. Payday lenders in Colorado continue to make short-term loans
of $100-$500 at legal interest rates of between 182%-520%. The survey also shows that the
national trend of payday lenders exploiting new partnerships with national banks to export the
deregulated laws of the banks state of incorporation has found its way to Colorado. ACE Cash
Express who claims to provide small loans as a service of the Goleta National Bank boldly states
that it allows three (3) rollovers when DDLA explicitly prohibits more than one (1) rollover of a
payday loan. The survey also shows that fee disclosure's required by the DDLA are insufficient
in alerting consumers prior to completing a loan transaction to the pitfalls and high fees of a
payday loan.

 The State PIRGS, and Consumer Federation of America, "Show Me The Money: A Survey of Payday Lenders and
Review of Payday Lender Lobbying in State Legislatures". February 2000.

II. Introduction:
        Payday loans are single-payment short-term loans usually based on personal checks that
go by a variety of names, including "deferred presentment," "deferred deposits," "cash advance",
or "check loans." Some payday lenders are now requiring that loan applicants authorize the
lender to directly debit checking account. In a typical loan the consumer writes a personal check
drawn on his bank account for the amount borrowed plus the fee. The lender agrees not to
deposit the check until the consumer's next payday or up to 14 days. An average payday loan in
Colorado costs $18.79 to borrow $100 for two weeks, or 488% Annual Percentage Rate (APR).
Payday loans are made by check cashing outlets, stand-alone payday lenders, and by a few banks
in partnership with check cashing outlets.
         Payday lenders take advantage of consumers who are often in desperate financial
situations and make it even worse with exorbitant fees and the threat of bouncing a check. Most
of the time a consumer who has taken out a payday loan does not have the money to pay it back
and "rolls it over", which increases the debt and adds additional fees. The fee, when translated
into a percentage of the check or loan equals triple digit annual interest rates.
         According to the most recent government data, 13.2% of families do not even maintain a
checking account and 83% of those families have income's of less than $25,000.2 Many
consumers who are denied services by traditional banks use check cashing outlets and payday
loans to conduct basic financial transactions. Consumers who seek a small loan from traditional
lenders, and cannot qualify are forced to go elsewhere. Traditional small loan companies still
make loans for less than $1,000, however most of the banking industry has turned its attention
toward larger loans. The failure of the banking industry to serve all consumers fairly has created
a void of banking services for certain consumers, that the predatory lending industry has eagerly

        The very nature of using a personal check in a payday loan transaction makes the practice
inherently coercive. Using a personal check as the instrument of a small loan places the
borrower at risk, and gives the lender enormous leverage. Since the payday lender has a
personal check to hold over the consumer, the lender knows that they will be paid prior to any
other monetary obligation of the consumer. Colorado and most other states prohibit lenders to
bring criminal "hot-check" prosecution for non-payment of a loan, however not all consumers
know that they have this protection. Payday lenders can threaten or actually deposit loan checks,
even when borrowers report that there are not enough funds in the bank to cover the check,
racking up both lender's and bank's "bad-check" charges. Reporting the borrower to credit
reporting agencies that report on "bad-check" writers can cause a consumer to lose the bank
account, or be unable to write checks in stores. The situation is exacerbated because both parties
going into the loan agreement understand that there are not enough funds in the account to cover
the check until the next payday.
         The design of payday loans leads consumers into a downward spiral of debt that harms
families, individuals and the community. Lenders typically don't get a credit report on
borrowers. The loans are payable in one balloon payment within days of the loan being made.
Although states like Colorado have attempted to limit the number of loans a consumer can take
out, it is very difficult to limit or outlaw rollovers, loan extensions, and serial loans. Consumers
 Kennickell, A et al, "Results From the 1998 Survey of Consumer Finances," Federal Reserve Bulletin, January
2000, Page 1.

continue to dig themselves deeper and pay triple digit interest rates and even borrow from one
lender to pay another.

III. Industry Growth:
        States that license Payday lenders saw huge increases in payday lenders, and payday
lending storefronts over the past few years. Colorado consumers borrowed over $86 million in
1999 and paid an average of 496.82% annual interest rate.3 This was up from $67 million in
1998 and an average annual interest rate of 486%. Stephens Inc., a Little Rock AK investment
company reports 9,000 storefronts nationally making payday loans since 1999, with a potential
mature market of 24,000 stores generating $6 billion in fees annually.4 Advance America which
began providing payday loans in 1997, now claim to be the nations largest provider of cash
advance services with 810 locations in 16 states. Advance America has approximately 29
locations in Colorado.
        Ace Cash Express, a publicly-traded check cashing chain which also makes payday loans,
reported record revenue and a 29% increase in net income in 1999. Ace reported that 11.7% of
its revenue came from payday loans, up from 10.1% in 1998. Ace's growth continued in 2000
with a reported 15% revenue increase from $122.3 million in 1999, to $140.6 million in June of
2000. In it's annual report of 2000 ACE reports; "Loan fees and interest increased $3.6 million,
or 25%, to $17.9 million in fiscal 2000 as compared to $14.3 million in fiscal 1999". The
annual report also shows an increase in the number of loans and the average loan amount. In
1999 the average loan amount was $200, and in fiscal year 2000 Ace Cash Express reported the
average loan amount was $240. Loan transactions in 1999 totaled 460,000; in 2000 the total was

IV. State Usury Law
         States can prevent payday loans through small loan interest rate caps, usury laws, and/or
specific prohibitions for check cashers. Regulation of payday lending varies significantly from
state to state, however there are three categories which state laws can fall into. The first category
of states essentially outlaw payday loan practices through interest rate caps, usury laws, and/or
specific prohibitions for check cashers. This first category of laws generally sets up guidelines
and standards that are far below that which the payday loan industry charges lenders. Twenty-
one states6, Puerto Rico, and the Virgin Islands, currently are in the first category of payday
lending laws.
         The second category of states allow payday lenders to operate and charge any interest
rate or fees agreed to by the parties to the loan. These are generally recognized as de-regulated
states where payday lenders are allowed to operate without interest rate caps, or fee restrictions.
There are eight states7 that fall into category two.

  State of Colorado Attorney Generals Office, "1999 Deferred Deposit Lenders Supervised Lender's Annual Report.
  Stephens Inc., Non-Bank Financial Service Industry Notes (2000).
  ACE Cash Express, "Annual Report 2000",
  These states are Alabama, Alaska, Arkansas, Connecticut, Florida, Georgia, Indiana, Maine, Maryland,
Massachusetts, Michigan, New Jersey, New York, North Dakota, Oklahoma, Pennsylvania, Rhode Island, Vermont,
Virginia, and West Virginia.
  These states are Deleware, Idaho, Illinois, New Hampshire, New Mexico, Oregon, South Dakota , and Wisconsin.

        The remaining twenty-two states, including Colorado, and the District of Columbia fall
into category three8. These states have passed statues or regulations specifically authorizing
payday lending. These states typically specify a maximum amount of the loan, and establish the
interest rate or fees to be charged, and often require licensing or registration. Some category
three states require lenders to put up a bond or maintain a certain level of net assets. Category
three state laws were once thought to be a compromise between industry and consumer
protections, however, as is shown in Colorado these laws do nothing to protect consumers from
the standard industry practices across the country.

V. Payday Loan Legislation
        Each year battles between consumer advocates and the payday loan industry heat up in
state legislatures. The state by state battle over legality and limits on payday lending has
continued in approximately 24 states during 2001.
        Case studies of state legislative battles over payday lending has shown that payday
lenders are hiring high-priced hired guns to seek enactment of weak, pro-industry legislation.
Their strategy is much like that used by the rent-to-own industry in 1980's and early 1990's to
enact their preferred version of legislation in nearly every state9. While consumer advocates
across the nation are joining forces to attempt to curtail industry's legislative efforts, the payday
loan industry grows increasingly stronger with every pro-industry bill passed in state legislatures
across the country.

VI. National Banks and Thrifts:
        A growing trend in this industry are predatory lending businesses partnering with national
banks and thrifts. Some national banks and thrifts have partnered with payday loan companies in
order to supercede state law through what is called "exportation". Exportation is done when a
bank is chartered in a de-regulated state; the bank then claims the right to export its home state's
lack of regulation all across the country regardless of whether their practices would be illegal in
the borrower's home state. Ace Cash Express, which has partnered with Goleta National Bank,
comment on increased revenue in their 2000 Annual Report that: "This increase resulted from
the introduction of the Goleta National Bank loan product in the last three months of fiscal 2000
and the expansion of the loan business to 19 more states".
        On November 27, 2000 the Office of Thrift Supervision (OTS) and the Office of the
Comptroller of the Currency (OCC) issued an alert to national banks and thrifts entering into
contractual arrangements with vendors to fund so-called "title loans" and "payday loans". In the
alert they state "Payday lending programs, as offered by some lenders or originators, may
involve lending practices that are abusive. In addition, payday lending carries significant credit,
transaction, reputation, and compliance and legal risks that raise supervisory concerns".10 The
advisory was an attempt to warn national banks and thrifts against the practices of payday
lending that pose a threat to national banks' standing with regulators. The advisory letter
addresses the issue of exportation by saying, "Payday lenders entering into such arrangements
 These states are Arizona, California, Colorado, Hawaii, Iowa, Kansas, Kentucky, Louisiana, Minnesota,
Mississippi, Missouri, Montana, Nebraska, Nevada, North Carolina, Ohio, South Carolina, Tennessee, Texas, Utah,
Washington, and Wyoming.
  The State PIRGs, and Consumer Federation of America, "Show Me The Money!: A Survey of Payday Lenders and
Review of the Payday Lender Lobbying in State Legislatures". February 2000.
   The Office of the Comptroller of Currency (OCC) Advisory Letter, AL 2000-10.

with national banks should not assume that the benefits of a bank charter, particularly with
respect to the application of state and local law, would be available to them".
        Eagle National Bank, Goleta National Bank, and County Bank of Delaware are all out of
state national banks that have partnered with payday lenders in Colorado. Ace Cash Express has
partnered with Goleta National Bank and has over 40 locations in Colorado with plans for
expansion. Eagle National Bank which offers payday loans through Money Mart, Loan Mart,
Check Mart, and Cash 'Til Payday has several locations throughout Colorado. County Bank of
Delaware offers payday loans to Colorado consumers through Easy Money, and via fax, and by

VII. Colorado Deferred Deposit Loan Act of 2000:
        In 2000 the Colorado General Assembly passed the Deferred Deposit Loan Act (DDLA).
The DDLA amended the Colorado Uniform Consumer Credit Code11 to create a new article
concerning the practices of payday lending or what they refer to as deferred deposit loans. While
they put some restrictions on payday lending practices they did not require deferred deposit loans
to be categorized as a small loan, and therefore be subject to the Colorado State small loan
interest rate cap of 36% per annum. The amended law allows not more than 20% of the first
$300 plus 7.5% of the excess to be charged12. For example a $100 loan held for two weeks at
20% of the advance translates to 520% APR compared to 36% APR permitted for other
Colorado small loan companies. Loans are only allowed one renewal (rollover)13 and the
renewal fee is subject to the same permitted fees as the initial loan transaction. The lender may
contract to receive a $25 fee if upon deposit the consumer's check is returned for insufficient
funds, plus court costs and reasonable attorney fees in the event of default, however the attorney
fees cannot exceed the loan amount14. The changes to the UCCC also included required
disclosure of fees in the store, and on the loan agreement.
        Most of the mandated disclosures are required on the actual loan agreement15, which one
does not receive until the loan transaction is finalized. Disclosure is not an issue that the payday
loan industry usually disputes in state legislation. In fact, industry often requests disclosure
requirements as this does little to dissuade consumers from completing a payday loan
transaction. A majority of the disclosures requirements are being complied with by the industry,
however the survey shows that even with fee and APR disclosures, Colorado consumers continue
to be gouged by triple digit interest rates charged by payday lenders. The survey did however,
find that several payday lenders do allow more than one rollover of a payday loan, while the
DDLA only allows for one.

VIII. Survey Results:
CoPIRG surveyed a representative sample of 30 payday lending outlets in Colorado. No payday
loan transaction was completed therefore required disclosures on the loan agreement were not
able to be quantified. The findings are as following:

   Colorado Revised Statute Article 5-3.1.
   Colorado Revised Statute 5-3.1-105.
   Colorado Revised Statute 5-3.1-108.
   Colorado Revised Statute 5-3.1-112.
   Colorado Revised Statute 5-3.1-103.

     !   Ace America's Cash Express, which has over 40 locations in Colorado, allows 3
         rollovers and Loan Mart allows 4 rollovers, when under DDLA (5-3.1-108) only 1
         rollover is allowed.

Since almost none of the licensed payday lenders post their fees and 70% of lenders do not
disclose the cost of these loans on applications or information materials, consumers do not
receive essential price information before committing themselves to these loans. Competition
does not drive rates below the legal maximum without clear price signals while consumers are
still making up their minds

     !   70% of payday lenders did not disclose the APR or fees on their loan application or
         information materials. While these disclosure's are not required by the DDLA, it
         illustrates that most consumers are not aware of the risks associated with the high costs
         of a payday loan prior to finalizing the loan transaction.

     !   94% of the payday lenders surveyed did not post fees conspicuously as required by the
         DDLA (5-3.1-113). Fee disclosure is simply posting the fee per $100 clearly in the

The percentage cap of 20% of the first $300 plus 7.5% of the excess for payday loans still
permits Colorado lenders to charge triple-digit interest rates for these loans.

     !   The average annual percentage rate per $100 was 451.7%.

     !   The average fee per $100 loan is $18.79.

     !   53% of payday lenders surveyed charged the highest allowable fee of 20.00 per $100,
         which equals an annual interest rate of 520%.

IX. Recommendations: CoPIRG, and Consumer Federation of America urge
the following reforms:
     !   Instead of legalizing payday loans Colorado should enforce small loan rate caps and
         usury laws to protect consumers from exorbitant small loan rates charged by payday
     !   States with no small loan or usury cap should enact a cap on small loans and keep
         licensed lenders under state credit laws.
     !   States that have already legalized payday lending like Colorado should, at a minimum,
         lower permissible interest rates and strengthen consumer protections based on the
         CFA/National Consumer Law Center (NCLC) model act.16
     !   Congress should stop the national bank regulators, notably the Office of the Comptroller
         of the Currency (OCC) and the Office of Thrift Supervision (OTS), from allowing
         nationally-chartered banks and thrifts to provide protection for payday lenders, from

  For a copy of the CFA/NCLC Model State Deferred Deposit Loan Act, contact CFA, 1424 16th St. NW, Suite
602, Washington, D.C. 20036.

        state consumer protection laws, especially since no federal law adequately regulates their
    !   Further, Congress should close the bank loophole which allows exportation of
        deregulated state laws, either by enacting a federal usury law that applies to banks or by
        prohibiting FDIC-insured financial institutions from making loans based on personal
        checks held for deposit.

X. Conclusion:
        The growth of the payday lending industry over the last few years has brought the
industry under increased scrutiny by both regulators, Congress, and state and local governments.
The findings of this report show that the category of state laws which authorize payday lending
and attempt to regulate the industry, like the Colorado Deferred Deposit Loan Act, fail to
adequately protect consumers from predatory high fees and triple digit annual interest rates.
Industry supported fee, and APR disclosures have not proven to detour consumers from payday
loans. Further, the fee, and APR disclosure as required by the Colorado DDLA is even less
effective at informing consumers of the costs and risks of a payday loan, since the disclosures are
only required on the finalized loan agreement. State laws like the Colorado DDLA have long
been thought to be a compromise between industry and consumer protections, however they
essentially change nothing in standard industry practice. Colorado legislators should revise state
statutes to hold payday lenders to the small loan annual interest rate of 36% that all other lenders
must abide by. It is critical that states stop passing legislation to authorize payday lending, and
instead hold payday lenders to state usury and small loan laws. Congress must act quickly and
enact legislation that rolls back some of the gains that the payday loan industry has made
legislatively. Congress should set minimum state standards for payday lending, force the Office
of the Comptroller of Currency to revoke the perceived ability of banks to participate in payday
lending in defiance to state laws with more than just an advisory statement. Finally Congress
should close the national bank loophole by either enacting a federal usury ceiling law or
prohibiting FDIC-insured financial institutions from making payday loans, either directly or
        CoPIRG recommends that cash-strapped consumers avoid the high costs and risks of
using payday loans. Consumers with short-term cash needs should try to solve their immediate
problems without borrowing money, such as asking for more time to pay a utility bill. If a loan
is unavoidable, shop for the lowest cost credit available, comparing both the dollar finance
charge and the Annual Percentage Rate. Cash advances on credit cards, and traditional small
loans are less expensive than a typical payday loan. Consumers with on-going financial
problems can seek help with budgeting and debt management from local non-profit consumer
credit counseling agencies or their credit union. Payday loan customers should only borrow
what they can afford to repay on their next payday without having to borrow again before the
next paycheck arrives.

The Colorado Public Interest Research Group (CoPIRG) is a statewide, non-profit public interest
research advocacy group that works on environmental, consumer, and good-government issues.
For over 25 years CoPIRG has been one of the states leading public interest groups, with over
15,000 members across the state. The mission of CoPIRG's Consumer Protection Program is to
protect consumers from fraud, privacy violations, unfair fees and unsafe products. Through a
three-pronged strategy of public education, direct service and advocacy, CoPIRG educates
consumers on their rights, provides counsel and information to consumers and advocates for
permanent solutions through legislation at our state capitol.