Next year, the Arizona Legislature will decide whether to eliminate payday lending in the state, which presents a dilemma for Republican lawmakers who will have to decide between their free-enterprise beliefs and a moral objection to the large fees on short-term loans.
Lawmakers will have to weigh whether the service provided to Arizonans who seek quick access to cash is greater than the potential for borrowers to get locked into a cycle of debt.
But a core principle for most Republicans is an adherence to minimal government regulation and a market-based system that is self-regulating. In other words, bad products equal no business – no government intervention required.
To some, the choice is clear. But many others will have to make a choice between protecting consumers from themselves and allowing an industry to flourish at the expense of its customers.
Rep. Cecil Ash, a Mesa Republican, said his natural inclination is to find a way for the industry to remain legal, because doing otherwise would restrict the liberties of consumers. But, on the other hand, Ash said it’s clear that the fees charged for the loans are large enough to be a concern.
“I’m not sure at what point the interest rates become so bad that the state should tell them they can’t do it,” he said. “When you start telling people what they can’t do, I’m conflicted.”
Rep. Doris Goodale, a Kingman Republican, said the high fees for the loans are unconscionable, and she will oppose them, even though it goes against her desire to limit government intervention in the marketplace.
“I believe it becomes almost entrapment. It continues until it almost overwhelms people,” she said. “I’m very conflicted here, but I want consumers to be protected from high, exorbitant rates.”
In many ways, the 2010 legislative session will be the industry’s equivalent of a final appeal for pardon by a death-row inmate, as the execution date for the state’s 591 short-tem lending shops is set for July 1, when the laws that allow them to exist are set to expire.
After a crushing defeat at the polls in 2008, the industry is desperate enough to avoid extermination that it is offering to subject itself to strict government regulations it has opposed for years if lawmakers will agree to let them remain in Arizona.
The payday loan industry is hoping a package of reforms and increased government oversight will allay the fears of those skeptical of the industry and sway enough lawmakers to allow the lenders to stay in business permanently.
A summary of draft legislation provided by HighGround, a political consulting firm that was hired by the payday loan industry, details the regulations that lenders are willing to accept. Chief among them is a real-time database that verifies borrowers only have one loan at a time. As written now, state law restricts borrowers from taking out concurrent loans, but lenders must rely on the honesty of the borrower.
Other concessions the payday loan industry is willing to make include writing loan documents in easy-to-read English and Spanish; a two-day right of rescission on loans; providing all borrowers with a document touting credit counseling; creating a no-cost repayment plan borrowers can use once per year; and more scrutiny by the Arizona Department of Financial Institutions.
Not so long ago, payday loans seemed like a bad idea to Grant Woods.
The former state attorney general said he voted against last year’s ill-fated industry-run ballot proposition that would have repealed the sunset date on the lenders and enacted mild regulations. Nearly 60 percent of voters cast ballots against the measure.
But Woods said he was persuaded to work for payday lenders after he looked at reforms proposed in other states and industry leaders said they would be willing to adopt them in Arizona, if it meant they could keep their doors open. He said he conducted a series of meetings recently with various community and political groups spanning both the political spectrum and the state on behalf of the payday loan industry.
“I think there’s a consensus that these are good reforms, especially now that the main piece – a database – has been filled in,” he said.
The regulations are stricter than those rejected by voters at the ballot last year. The ballot measure was aimed at eliminating the practice of “rolling over” loans to extend them and created a once-yearly repayment plan, but didn’t include a database or any reporting requirements.
Even so, the new plan doesn’t ease the trepidation of some lawmakers.
Rep. Frank Antenori, a Tucson Republican, said he has seen the firsthand the effects payday loans have on people. He draws on experiences during his time in the U.S. Army, which has since banned soldiers from using the loans.
“I’ve seen the disregard the industry has for the personal impact it has on people,” he said.
Although Marian McClure is no longer an elected official, she plans to wander Capitol hallways during the upcoming legislative session working to make sure the payday loan industry isn’t allowed to continue operating in Arizona. The Tucson Republican led the charge against the lenders during her eight years as a state representative.
“We’ve all seen what predatory lending has done to the housing market. In my mind, there really is no difference,” she said. “If we want to have a viable economy, we have to get rid of people who rip other people off.”
In 2007, when Rep. Bill Konopnicki was chair of the House’s Financial Institutions and Insurance Committee, he worked with McClure and the industry to hammer out a deal. But that agreement ultimately fell apart when the lenders balked at some of the regulations they are now proposing.
“I think what the voters turned down was payday loans. I don’t think they cared about the details,” said Konopnicki, a Safford Republican.
One thing working in the industry’s favor may, in fact, be the state’s free-falling tax revenues. While there is the possibility the reform efforts will get lost in the legislative shuffle as lawmakers scramble to erase billions of dollars of red ink in the state budget, the dissolution of an entire industry – even one that isn’t well-liked by the public – may not be on the wish-list of many legislators.
“I don’t see a decision to outlaw a whole industry as being helpful to the economy,” said Rep. Nancy Barto, a Phoenix Republican. “I’m not so sure that letting a whole industry sunset because they don’t like the look of a building on the street corner is a good idea.”
The 591 payday lenders have about 5,000 employees and pay about $85 million annually in taxes, said Lee Miller, a lobbyist for the industry.
“If you shut the doors, that’s probably 4,995 people who are going to become instantly unemployed,” he said. “The state doesn’t need 4,995 people instantly needed government services.”
Eliminating the lenders won’t eliminate the need for these loans, Miller said.
However, critics say people got along just fine before payday lending was authorized in 2000. They were able to turn to friends or family for short-term help, or just prioritize their spending.
Although Antenori generally supports free-market principles, he said this is one area where the government has the responsibility to protect its citizens. One solution would be to allow banks and credit unions to enter the short-term lending arena more easily, he said.
Already, banks such as Wells Fargo allow customers to borrow up to $500, at 10 percent interest, for up to 30 days.
“I think the state needs to look at ways of giving financial institutions the ability to offer micro-loans,” he said.
Other lawmakers, though, say everything is working out just fine. Rep. Michele Reagan, a Scottsdale Republican and chair of the House Commerce Committee, said she supports the plan to allow the industry to continue operating.
“They’re providing a service that people seem to enjoy,” she said. “It doesn’t seem like a rip-off to me.”
The industry’s fate now hinges on how the Legislature perceives what the lenders do. There’s little doubt it will face an uphill climb, after last year’s election loss and a public perception the lenders prey on the ignorant.
Rep. Steve Farley, a Tucson Democrat, said the draft proposal for widespread regulation is too little, too late. He said the industry is getting desperate to stay alive.
“It’s too bad that they weren’t willing to do this when we were willing to work with them,” he said.