CO: Advocacy Letter to Colorado Legislature in Opposition to Colorado House Bill 1229

Ms. Julie McCluskie
Speaker of the House
Colorado General Assembly
200 E Colfax Avenue
Denver CO, 80203

Mr. Stephen Fenberg
President of the Senate
Colorado General Assembly
200 E Colfax Avenue
Denver CO, 80203

Mr. Mike Lynch
Minority Leader
Colorado General Assembly
200 E Colfax Avenue
Denver CO, 80203

Mr. Paul Lundeen
Minority Leader
Colorado General Assembly
200 E Colfax Avenue
Denver CO, 80203

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Dear Speaker McCluskie, Leader Lynch, President Fenberg, and Leader Lundeen:

We are writing to express concerns regarding HB 23-1229 and the impact it will likely have on Colorado consumers who require access to safe, reliable and affordable credit options. The bill, in its current form, would decrease access to responsible credit, put community banks, state banks, and credit unions at a disadvantage and lead many Colorado consumers, particularly those in minority and rural communities, with far too many predatory and high interest alternatives. We recognize and thank the sponsors for their work on this legislation and commit to working alongside you to craft statutory and regulatory parameters that will enable innovation in financial services and access to credit without compromising on regulatory compliance or consumer protection.

The American Fintech Council’s (AFC) mission is to promote an innovative, transparent, inclusive, and customer-centric financial system by supporting the responsible growth of lending, fostering innovation in financial technology (fintech), and encouraging sound public policy. AFC believes that the goal of sustainable access to credit should be present in all lending and servicing components, and that innovation can be a driver of fair and responsible access to credit. Innovative fintech platforms can expand access for communities and small businesses that have been traditionally underserved, creating a more inclusive and resilient financial system. AFC supports a fair financial services system where products are designed in compliance with regulation and where predatory conduct has no place.

HB 23-1229 will limit access to credit options for millions of Colorado consumers.

As a trade, and consistent with national consumer advocates, the AFC has supported a 36% annual percentage rate (APR) standard at the state and federal level. We have worked tirelessly with consumer advocates and state legislatures in Illinois, New Mexico, California and many other states on legislative proposals and new regulatory frameworks that provide clarity for lenders and options for consumers. In August of 2020, some of our members worked with Colorado Attorney General Phil Weiser on a settlement that encourages responsible bank-fintech partnerships to create safe access to credit and currently serves as a model for other states across the country. This legislation would negate that settlement and undermine the work that Attorney General Weiser did to create access to safe and affordable credit in Colorado.

HB 23-1229 includes provisions that would restrict the ability of state-chartered banks outside of Colorado to offer responsible and affordable consumer loans in the state of Colorado. Today, bank partnerships with fintech companies are not only facilitating financial inclusion but they are keeping community banks and smaller financial institutions vibrant, competitive and independent. A key provision of the bill would limit nonbank fintech lenders from partnering with out-of-state banks to offer affordable consumer credit options at or below 36% APR. AFC’s largest partner bank, a state-chartered bank outside of Colorado has facilitated more than $1.5 billion in consumer loans to Colorado consumers in 2021 and 2022 alone, in partnership with many Colorado supervised lenders. These installment loans are offered through a bank partnership that complies with the aforementioned Settlement that, among other key provisions, includes Consumer Terms Criteria specifying that loans have APRs no higher than 36%. These are affordable installment loans offered through a responsible bank partnership that should remain available for Colorado consumers. Importantly, HB 23-1229 would not only exacerbate gaps identified by the January 2023 Report to the Colorado Attorney General on the Availability of Safe and Affordable Credit From Non-Depositories in Colorado but it could also magnify the role of unlicensed lenders in the state, ultimately limiting necessary oversight and leaving consumers open to potential harm.

HB 23-1229 will make Colorado’s concentrated lending market even less competitive. ‍

Colorado consumers throughout the state and across the credit risk spectrum currently lack a range of affordable credit options and HB23-1229 would further hinder a credit market already lacking in adequate competition. As the January Report to the Attorney General noted “[a]s further evidence of market concentration, the three largest lenders accounted for 79% if all Other Supervised Loans and 73% of total dollar volume.” On loan assignments, the report also found “the three top licensees accounted for almost 75% of the Other Supervised Loans taken by assignment.” Lenders also reported deploying tighter credit criteria in Colorado and being more restrictive in offering unsecured loans. Given the statutory parameters enumerated in HB23-1229, market concentration would likely increase while credit availability decreased. Thus, creating an exceptionally uncompetitive and limited credit environment, especially for traditionally underserved consumers.

Our membership includes multiple responsible fintech companies and community banks that seek to provide Colorado consumers with credit options. Since 2020, a selection of our members have provided more than $1.5 Billion in loans to nearly 800,000 Colorado consumers with transparent loan options below 36%, filling an important gap in the credit market. Our members will be facing critical challenges in providing optionality to consumers for access to affordable credit in Colorado should HB 23-1229 pass and be signed into law in its current form. This legislation will unnecessarily shrink the availability of affordable credit in the state.

HB 23-1229 will further limit affordable options for lower credit tiers.

The January Report to the Attorney General also found evidence that credit for larger installment loans is less available for the bottom credit tiers in Colorado (just over 20% of the state’s population) as well as in Iowa. This is another segment of the market susceptible to lenders that are outside the scope of HB 23-1229.  However, another 2020 study also provided an overview of the mainstream consumer credit options that might substitute should the state prohibit consumer loans provided through a partnership between an out-of-state bank and supervised nonbank lender. The study found “that to the extent the bank partnership loans comprised largely subprime and deep subprime borrowers, many if not most would be forced to have their real credit needs met by higher cost AFS providers, as they would not qualify for available and relatively more affordable mainstream alternatives owing to their risk profile.”

The most predatory unlicensed lenders could fill Colorado’s sizable gap in smaller installment loans.

Citing Experian Data, the January 2023 Report to the Attorney General noted a sizable gap in the share of installment loans under $3,000 and that the unsecured loans skew larger in Colorado, as well in Iowa. This segment of the market is particularly susceptible to unlicensed lenders that are outside the scope of state law and HB 23-1229. Consumer complaints to the state of Maine, for example, were all about unlicensed lenders charging 700%+ APRs that were outside the scope of state law.

Lawmakers should define the scope of unlicensed lending activity in the state, including activity that is not be captured by HB 23-1229 and would be accelerated by the bill’s passage.  The authors of the January Report to the Attorney General noted, for example, that “to the extent there are tribal (or other unlicensed) lenders operating in Colorado, their activity is not reflected in any of our findings.”

Conclusion ‍

Federal researchers and others have found that bank-fintech partnerships have lowered the cost of financial services in underserved communities. Researchers have documented fintech enabled bank lending in banking deserts, low-income communities and to the “invisible prime” consumers whom other lenders might overlook or overprice.

HB 23-1229 will restrict responsible bank-fintech partnerships, further undermine market competition, and limit affordable consumer credit options for the hardest to serve Colorado consumers. For these reasons and more, we urge Colorado legislators to work with us, and our members, to craft a law that builds on the 2020 Colorado Attorney General settlement that mirrors laws of other diverse states such as California, New Mexico, and Illinois. This will strike the right balance between responsible access to credit and protecting consumers from high-rate predatory lenders.

Sincerely,

Phillip Goldfeder
CEO
American Fintech Council