After Colorado voters cracked down on payday loans, lenders found loopholes. A new bill would try to close them.

Sifting through receipts and debts, Matt McCune can look back through the financial debris of his bankruptcy clients’ lives. In the wreckage, he often finds a common accelerant.

“Basically what I see, the people that are struggling will go to do these short-term loans to get through the day, through the week, meet the bills that need to be met,” the Denver attorney said. “When it comes time to pay the loan plus the (interest), they don’t have it, so they do another loan. So now they’re financing the original principal and the interest on another loan. It’s like reverse exponential growth.”

The clients who fall into these spirals, McCune said, often need money for emergencies: brake replacements, an immediate medical bill, rent that backed up. A recent national study found that fewer than half of American adults could afford to pay a sudden $1,000 charge out of their savings.

For years, Coloradans in these situations turned to payday loans — low-dollar, high-interest, short-term borrowing. The loans could simultaneously bail them out of one crisis and lock them into another. Then, in 2018, Colorado voters overwhelmingly passed Proposition 111 and capped the interest and other fees for those loans — which had averaged 186% — to 36%.

In the years since, the lending industry has turned to the internet and little-known provisions of state and federal law to dole out higher-interest loans to Coloradans, outside the limits of Prop 111. While there are fewer such loans now than before 2018, tens of thousands of residents are purchasing alternative charge loans — which are cousins to payday loans — often at rates triple allowed by Prop 111. According to a Colorado Attorney General’s Office report, nearly 96,000 such loans were distributed here in 2021; as many as 20% of borrowers struggled to pay them back.

Rep. Javier Mabrey, a Denver Democrat, called the alternative charge loans “loopholes” left in the wake of Prop 111. McCune likened regulatory efforts to limit predatory lending to a game of Whac-a-Mole.

Colorado lawmakers have taken up the mallet. Last week, House Democrats passed a bill that would tighten a provision of state law governing alternative charge loans, which are allowed under state law but were little used, lawmakers and advocates said, before Prop 111 cut into lenders’ profit margins. The measure — HB23-1229 — would also carve the state out of a 43-year-old federal law that allows out-of-state banks to lend to Coloradans outside the bounds of Prop 111, a growing issue given online lending and the rise of “fintech” — or financial technology — companies.

As it stands, lawmakers and advocates said, a bank in Utah — which has no interest caps — can work with a fintech company to loan to Coloradans at whatever rates the companies choose. Authorities here already have tried to crack down on the practice: In 2020, the Colorado Attorney General’s Office reached a settlement with two lenders that allegedly had partnered with out-of-state banks to avoid regulations here.

“Many of these fintech-type loans appear to be legitimate choices, and they look like they’re connected with FDIC-insured institutions,” said Nina DiSalvo, the policy director for Towards Justice, a nonprofit law firm supporting the bill. “But they’re actually very harmful to Colorado (borrowers). They offer extraordinary loan terms; interest rates in the triple digits are not unusual.”

Much of the debate on the bill focused on the alternative charge loan provisions. The loans are similar enough to payday loans that McCune — and his clients — use the terms interchangeably. They’re unsecured — as opposed to payday loans, which usually are tied to borrowers’ paychecks — and typically are made on short, three-month terms. In 2019, the average amount borrowed via alternative charge loans was $531, at an average fee and interest rate of nearly 114%, according to the Attorney General’s Office.

They’re not as lucrative as payday loans and were largely unused by lenders until Prop 111, experts said.

“These loans present a barrier to economic security and circumvent voter preferences for reasonable caps on high-lending products,” Mabrey told lawmakers late last month. He’s co-sponsoring the bill, together with Aurora Democratic Rep. Mike Weissman.

Weissman and Mabrey’s measure would effectively limit the total interest and fees that could be charged on the loans to 60% or 65%, Weissman told The Denver Post, while cutting fees and giving borrowers more time to repay the money. Those interest levels are higher than what Prop 111 allows for payday loans, but Weissman said his goal was to comply with the “spirit” of the ballot measure while giving lenders enough room to make a profit and stay open.

Short-term lenders have a place in the broader banking ecosystem, he said, but they need limits.