As the federal government walks back historic regulations on payday lending, Colorado voters this fall will be asked to tighten them -- a sign that strong consumer protections are increasingly being left to the states.

Short-term loans, often called payday loans because they’re due on the borrower’s next payday, have average interest rates of 129 percent in Colorado. Nationally, rates average between 150 percent and more than 600 percent a year. A ballot proposal, which was certified as Initiative 126 by the secretary of state on Tuesday, would cap those rates at 36 percent. If passed, Colorado would be the 16th state, plus the District of Columbia, to limit payday loan rates.

The ballot initiative comes as new leadership at the Consumer Financial Protection Bureau (CFPB), which was created in response to the predatory lending practices that led to the 2007 subprime mortgage crisis, has been dialing back regulations on the lending industry. Earlier this year, CFPB Interim Director Mick Mulvaney, President Trump’s budget director, threatened to revisit a recent rule regulating payday and car title lenders. More recently, the bureau has taken steps to weaken the Military Lending Act, which protects military families from high-interest-rate loans.

Now, two proposals in Congress could exempt some types of payday lenders from state interest rate caps. The bills would allow high-interest-rate loans to be transferred to lenders in other states, even if the latter state has an interest rate cap. Opponents worry that, if passed, the federal legislation would make consumer protections in place at the state level irrelevant. 

“States have always played a critical role and been a battleground for consumer protection issues regarding payday loans,” says Diane Standaert, senior legislative counsel for the Center for Responsible Lending (CRL), an advocacy group. “That’s even more true today in light of the rollbacks that are happening at the federal level.”

Nationally, states have been stepping up regulations on short-term lenders since the early 2000s when research began to emerge that the loans could be predatory and keep borrowers in a cycle of debt. It’s not unusual for a $300 loan, for example, to be rolled over many times and ultimately cost more than $800 in principal and interest, according to the CRL. The repeat borrowing is called loan churn and accounts for roughly two-thirds of the $2.6 billion in fees that lenders charge each year.

Colorado first tried to regulate payday lending in 2010 when it reduced the cost of the loans and extended the length of time borrowers could take to repay them. That helped bring down average payday loan annual interest rates there. But research by CRL has found that some lenders were finding ways to work around Colorado’s restrictions.

According to a fair lending group called the Financial Equity Coalition, which is behind the ballot measure, payday lenders in Colorado are avoiding the restrictions on loan churn by making borrowers take out a second loan when they can’t pay off the first one. A rate cap would discourage this practice.

Earlier this year, the payday lending industry challenged the proposed initiative in court, arguing that petitioners' use of the words “payday lending” and “payday loans” were misleading catchphrases. The Colorado Supreme Court ruled against that challenge, allowing the petitioners to continue collecting signatures for the initiative. Ultimately, supporters submitted 189,297 signatures, according to the secretary of state.

So far, there's no polling on Initiative 126, and the payday lending industry has not begun actively campaigning against it. If it does, observers expect the industry to argue that lowering rates would hurt lenders' profit margins and cause them to significantly curtail loan issuance. That, in turn, they typically warn, would drive consumers who need quick cash into the hands of unregulated online lenders and services.

But that argument has proven to be generally untrue in the experience of other states with rate caps.