by Jerry Kopel

This tornado never touched the ground. If it had, there would have been a disaster. The tornado began as a quiet wind entitled HB 1237 by Rep. Joel Judd (D) and Sen. Doug Lamborn (R) "Concerning Technical Modifications...to the Uniform Consumer Credit Code." The bill was requested by Attorney General Ken Salazar and would normally have received a 100 to 0 vote in the legislature.

Once the bill passed the House, trouble began. Colorado's payday lenders, unhappy that the attorney general's office was actually enforcing the law against them, tried to get out from under the Uniform Consumer Credit Code (UCCC).

Payday lenders charge extremely high interest rates for very short term loans. Debtors leave a postdated check to be cashed by the lender as set out in the contract. By statute, the payday lender can receive back $575 for as little as a week for lending $500.

If you can loan the same $500 out each week for a year to different people, you make $3,900 in interest (20 percent on the first $300, 7.5 percent on the next $200) and still have your original $500. That's enough to have your local bartender salivating.

The amendments put on the bill in the Senate were disastrous. One would have taken payday lenders out from under the UCCC remedies. Examples provided by the attorney general's office:

Payday lenders would be exempt from laws prohibiting "(1) loan agreements requiring consumers to waive their rights (2) discrimination in lending (3) confessions of judgment without the need for a court order, (4) wage garnishment without obtaining a court judgment." (Actually, the U.S. Supreme Court in 1969 ruled garnishment without a court finding of liability unconstitutional.)

Also, payday lenders, according to the attorney general's office "would not be required to disclose the cost of the loan under the Truth in Lending Act; provide receipts for cash payments; or provide co-signer notices." And the payday lender "may choose whether to offer credit to a husband and wife separately or jointly." Instead of $500 earning $3,900 in interest, the $500 could earn $5,200 in interest (20 percent on each $250 loan.)

Payday lenders could have safely made a loan "based only on evidence of a bank account (even with a negative balance) and a pay stub," instead of considering a borrower's debts and liabilities.

HB 1237 as amended passed the Senate, 24 to 11. Those voting "no", all Democrats, were Sens. Fitz-Gerald, Groff, Grossman, Hanna, Isgar, Linkhart, Phillips, Reeves, Sandoval, Tupa, and Windels. The House obtained a conference committee, which eliminated all those amendments on the understanding the UCCC administrator would provide "guideline letters" to lenders on avoiding unconscionable acts and loan splitting. HB 1237 then passed the legislature. The guideline letters were issued June 16, 2003.

Forgetting legalese, you can divide a loan between husband and wife, but there is a presumption of loan-splitting, a violation of law. A spouse who desires separate credit "must do so separately and voluntarily". What is voluntary "depends on the facts". A signed document by the debtors indicating they understand what is happening is helpful. The lender may NOT make the decision. It is up to the debtors.

Is it clear at the time of the loan that debtor can repay under the contract terms? If not clear, the loan is presumed unconscionable.

"Logically, any lender should review assets such as salary, benefits, the date the consumer is paid or receives benefits and the consumer's liabilities. The lender must also document and maintain this information in its records."

The law on what is unconscionable was deliberately kept flexible to allow for changes in lending practices. The more and better records the lender keeps as to the debtor's ability to repay, the less the presumption the loan was unconscionable.

In my opinion, the payday lender law ought to require the consumer be told that he or she would likely be better off to get a loan from a pawn shop which can only charge 10 percent per month under Article 56 of Title 12, $50 for a $500 loan for 30 days.

(Jerry Kopel served 22 years in the Colorado House.)