Attorney General releases reports on state’s 2008 subprime lending

DENVER — Colorado Attorney General John Suthers today issued three reports on Colorado’s 2008 subprime consumer lending activity. The reports cover lenders licensed by the Office of the Attorney General and do not include data on all loans issued in the state. The data mirrors the overall decline in Colorado’s economy last year and the slowing extension of credit. New mortgage and installment lending decreased more than 50 percent even as lenders continued to collect and service more than $3 billion in previously-issued loans. Delinquencies and defaults on installment loans increased during 2008. Payday lending volume also decreased last year. Default rates on payday loans were significantly lower in 2008 than in the previous year.

“Although not unexpected, the increase in defaults on these subprime loans is troubling,” Suthers said. “Consumers in financial distress could face repossessions, foreclosure and impaired credit records. More than ever, consumers need to communicate with creditors about their financial situations. Creditors also should consider reasonable work-out plans or loan modifications and engage in responsible lending practices.”

Nonbank lenders that make or take assignment of subprime consumer loans (with annual percentage rates higher than 12 percent) must be licensed as supervised lenders under the Uniform Consumer Credit Code and report annual lending activity. The 2008 reports include data for 400 companies at 1,292 licensed locations both inside and outside Colorado. The data is compiled into composite reports, based on loan type. The reports detail trends in deferred-deposit loans (commonly called payday loans), traditional supervised loans (made by finance companies and junior-lien mortgage lenders) and small-installment loans.

Payday Loans

Payday loans are loans limited by law to $500 or less due on the consumer’s next payday, typically in two weeks. The typical annual percentage rate on a two-week $500 payday loan, at the maximum $75 finance charge, is 391 percent. The typical annual percentage rate for a two-week $300 payday loan, at the maximum $60 finance charge, is 521 percent.

In 2008:

  • The number of licensed payday lenders decreased by 1.3 percent to 610 licenses.
  • The number of Colorado residents obtaining payday loans increased by 1 percent to 303,462 consumers. However, this number is overstated due to consumers borrowing from more than one payday lender.
  • Charge-offs/uncollectible payday loans decreased slightly from 4.8 to 4.4 percent (dollar amount charged-off as a percentage of total dollar amount of loans made).
  • Payday lenders made more than $566 million dollars in payday loans, an 11.4 percent decrease in loan volume and a 13.1 percent decrease in number of loans.
  • The average payday loan amount increased by $7 to $369 with a 317 percent average annual percentage rate.

Payment-plan data indicates:

  • Twenty-five percent of payday loan consumers entered into one or more payment plans. This number is overstated to the extent that some consumers obtain loans from more than one lender.
  • Seven percent of payday loans made in 2008 were converted to payment plans.
  • Approximately three-quarters of payment plans were successfully completed.
  • More than 70 percent of lenders instituted “cooling-off” or “waiting” periods between loans, avoiding consecutive loans and limiting payment plan eligibility. (Consumers with four consecutive payday loans must be offered the opportunity to repay the last loan in six installments due on each payday.)

Small-Installment Loans

Small-installment loans are limited by law to loans of $1,000 or less and are due within 90 days to 12 months.

In 2008:

  • Nine companies made small-installment loans. Since then, license surrenders reduced the number to six companies. Some payday lenders offered small-installment loans in 2008 but have since exited that market.
  • Loan amounts increased 29 percent with the average small-installment loan worth $589 dollars.
  • Lenders loaned $15.9 million in small-installment loans to 14,905 Colorado consumers. This represents a nearly 4 percent decrease in loan volume and a 7 percent increase in consumers.
  • The average contract-loan term was nine months, but the average actual loan term was four months. Seventy percent of these loans were refinanced.
  • Average annual percentage rates ranged from 59 to 222 percent, depending on loan amount and loan term.
  • Charge-offs (uncollectible loans) increased from 8 percent to 9.7 percent (dollar amount charged-off as a percentage of dollar amount of loans made).

Traditional Supervised Loans

The supervised lender report contains data on sub-prime loans made by finance companies, insurance premium finance companies and mortgage lenders that primarily make junior lien loans. Supervised loans also include auto and student loans and those for household goods. The report reflects a continued drop in new loans in 2008.

In 2008:

  • The number of licensed supervised lenders decreased 40 percent to 654 licenses. This reflects the continued decline in the number of mortgage companies due to lack of funds to lend and tighter credit standards. In addition, several lenders became subsidiaries of national banks or federal savings associations, exempt by federal law from state licensing and regulation.
  • Overall, loan volume decreased 53 percent. The decline was mostly due to a 77 percent reduction in mortgage loans. Auto loans decreased by about 50 percent.
  • Despite the drop in new loans, supervised lenders continued to service and collect over $1.6 billion dollars in existing loans, $1.65 billion in credit sales, and $85.3 million in automobile leases.
  • The average loan amount decreased 49 percent to $8,344.
  • The average annual percentage rate for most closed-end supervised loans increased from 16 to 18 percent.
  • The number of delinquencies (late payments) on supervised loans increased by 23 percent and the number of supervised loan defaults (non-payment) doubled from 2007.

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The Office of the Attorney General enforces the Uniform Consumer Credit Code, regulates supervised lenders and retailers selling goods and services on credit and investigates consumer complaints. The annual reports do not include data from lenders that make prime-rate loans; financial institutions such as banks, credit unions, and savings and loan associations; creditors that make indirect loans; and mortgage companies that make first mortgage residential and refinance loans, which are exempt from Uniform Consumer Credit Code licensing. The Office of the Attorney General also enforces state laws on credit repair and debt management services.

These reports and those from prior years can be obtained at www.coloradoattorneygeneral.gov/uccc.

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