Second verse, same as the first…
Colorado's largest subprime lender is back at the General Assembly, asking lawmakers once again if it can alter its lending structure in order to gain more profits on loans made to consumers who have poor to fair credit ratings.
But this time the legislation, Senate Bill 16-185, could increase borrowing costs for a broader segment of consumers, to include anyone who gets an auto loan financed by an auto dealer or for someone just buying furniture with a store credit account.
The biggest player in the subprime lender market is One Main, formerly known as Springleaf Financial. Springleaf merged with One Main last November, a move cheered by Wall Street, which rewarded the merger with a near 16-percent boost in the company's stock price.
One Main is owned by Fortress Investment Group, a Wall Street hedge fund that includes several former directors of Goldman Sachs.
These kinds of subprime lenders make loans to people who have poor to fair credit ratings. These are different from payday loans, though, which are limited to $500 and must be repaid in six months or less, but with annual percentage rates (APR) that can reach 200 percent or higher.
For a subprime loan, according to One Main's website, a consumer can borrow up to $25,000. Finance charges range from 15 percent to 36 percent, and allow repaying plans of up to five years.
It's the second time around for late-in-the-game legislation that would change the structure of subprime loans in Colorado. Last year's bill, House Bill 15-1390, was introduced with just six days left in the legislative session. It sailed through the House in just three days with only two Democrats voting against it.
The measure didn't slow down once it hit the Senate, although by then consumer rights groups had begun to marshal opposition. In the Senate, two Democrats joined with the upper chamber's 18 Republicans to approve the bill, and off it went to the governor's desk.
And there it hit its biggest roadblock.
Democratic Gov. John Hickenlooper vetoed the bill almost a month later, after heavy lobbying from consumer groups. In his veto letter to lawmakers, he cited testimony from the Attorney General's office, which said that nothing in their analysis indicated “this type of consumer credit is not available or that changing the rates would make it more available.” He also cited the rush to get the measure through the legislature by the bill's sponsors, which the governor pointed out gave “interested parties little time” to review the bill.
Under last year's bill, a subprime lender could loan someone up to $3,000 with a maximum finance charge of 36 percent. A loan of between $3,000 and $5,000 would accrue a 21 percent finance change, and a loan of more than $5,000 would be charged 15 percent.
The finance charges also could be “blended,” which means that the first $3,000 of the loan would be charged that 36 percent; the next $2,000 would be charged the 21 percent, and anything over $5,000 would be charged 15 percent.
This year's bill says that the amount financed can be adjusted for inflation, with that adjustment taking into account inflation dating back to 2000. The amount loaned can then be adjusted annually for inflation thereafter.
Confused? You should be.
So how would the law, should it pass, affect those who borrow from subprime lenders?
According to Rich Jones of the left-leaning Bell Policy Center, the bill would raise the cost of borrowing to Colorado consumers to the tune of about $9.5 million, “for no justifiable reason.”
Jones cites as an example a $5,000 loan paid over 36 months. Under the bill, the finance cost would increase from $2,098 to $2,338, a 26.9 percent hike.
But One Main has other ways of making money on its loans, Jones said: through another arm of the company that sells expensive credit insurance.
Jovan Melton, a Denver Democrat in the House, carried last year's bill and is the lower chamber's sponsor of this year's Senate comeback bill. He said the number of subprime lenders in Colorado has dropped from eight to one. That would be One Main, although mergers are responsible for some of that decrease. But the state went from about $1 billion in loans through subprime lenders to around $200 million in the last decade, and the number of loans have dropped by half, he said.
“We're seeing a decrease in the number of loans because there are fewer providers,” Melton told The Colorado Independent. “We'd like to see more options instead of payday lenders and pawn shops…[subprime lenders] may be profitable nationwide but they aren't profitable in Colorado.”
One Main's Phil Hitz told the Senate Finance Committee Tuesday that 24 branches of One Main and Springleaf have closed in Colorado in the last few years. Yes, changing the law will cost the consumer more money, Hitz admitted. “Quite frankly, it cost us more money to do business in this state.” And yes, the company is profitable, Hitz said, which is why investors put money into it.
”But why should the rest of the country subsidize what goes on in Colorado?” he asked.
Bell Policy's Jones has a reply: it's because Colorado has strong lending laws that protect consumers.
And then there's the issue of how the bill would affect those who make large purchases on credit from retailers. Julie Mead, a deputy attorney general and Administrator of the Uniform Consumer Credit Code in the AG's office, testified that the statute being changed also applies to any consumer credit tied to retail sales, such as cars, electronics or furniture. The Colorado Office of the Attorney General is neutral on the bill.
Boulder Rep. KC Becker was one of the two House Democrats who voted against the 2015 version. This year's bill doesn't appear to be any better, she indicated Wednesday.
Becker said last year's bill concerned her because it lacked an appropriate balance between lenders and consumers. “There wasn't enough consumer protection in it,” she said.
As for this year's bill, Becker said she's willing to listen to the proponents.
But, she says: “we still have to make sure there are adequate consumer protections and that it isn't predatory.”
[Photo credit: Butz.2013 via Creative Commons on Flickr]
