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Payday Limbo

After losing a two-year, multimillion-dollar battle with voters and lawmakers, Arizona’s payday lenders are fighting for their lives.

The industry is set to expire July 1, a reality that was reinforced during the legislative session when lawmakers rebuffed three attempts to keep it alive.

But industry executives say the high-interest, short-term loan business will find ways to survive, if only with a different, less-lucrative business plan. Critics say like any good financial scheme, payday lenders will look to get a return on their massive investment left behind and will be back with its cadre of lobbyists.

Rather than shut down for good, some are looking at auto title loans, check cashing and other financial services they can provide that would keep at least some of their 603 stores open and some of their nearly 5,000 workers employed. But there may be only so much room in the market for those services, and many other businesses already offer them.

Steven Schlein, a spokesman for the Community Financial Services Association of America, a national payday lending group that represents 60 percent of the lenders in Arizona, said payday loan businesses are still evaluating their options.

“They can make other kinds of short-term loans. They’re going to stay in the short-term lending business, absolutely,” Schlein said.

Some lawmakers are convinced payday lenders will stick around, biding their time under a different business model, until next year when the Legislature begins another session with new members. Critics of the industry say payday lending is simply too lucrative and that the industry has invested too much in the fight to simply fade away, even if it has to lay low for a year or two. In 2008, the industry spent $15 million on a failed ballot measure that would have saved payday lenders.

Sen. Debbie McCune Davis, one of the Legislature’s most active foes of payday lending, said she believes the industry may try a “backdoor approach” similar to a recent proposal that was pitched in the Senate Finance Committee.

Instead of reauthorizing the law that allows interest rates that add up to about 400 percent annually, industry supporters proposed changing the law to allow higher fees on consumer loans that are otherwise capped at 36 percent interest. That bill was pulled from the committee’s agenda without a vote due to a lack of support.

“What they’re hoping is that the public attention to the issue will quiet down, and that they’ll be able come back in and simply influence legislators to give them another mechanism to do business. Essentially, that’s what’s happened in other states. They don’t just walk away,” said McCune Davis, a Phoenix Democrat.

McCune Davis said she doubts all 603 payday lenders in Arizona will simply close their doors on July 1, and some industry insiders say she’s probably right. Some, though not all, may stay in business by offering services such as auto title loans, which are short-term loans given against the value of a borrower’s car that consumer groups say can  bring nearly 700 percent interest. Businesses may also turn to check cashing, money wiring and installment loans, which are loans that are paid back in small, fixed amounts.

Payday lenders and their supporters say the demand for the short-term, high-interest loans isn’t going away. Some credit unions are already looking to pick up some of the slack left behind by the industry’s pending demise.

Many credit unions already offer alternatives, such as low-limit credit cards, “credit builder loans” with one- to two-year repayment plans and other services, said Sandy Watts, executive director of the Arizona Credit Union League. Watts and Scott Earl, the organization’s president and CEO, said credit unions are looking for new services they can provide as alternatives to payday loans, though they likely won’t be quite as easily obtainable as payday loans.

“I don’t think there’s any credit union that’s planning on being open on a street corner at 10 o’clock at night to fill people’s loan needs. But I do believe that credit unions have alternatives, and it’s much better for the consumer,” Earl said.

But many payday loan supporters are skeptical that credit unions can truly fill the need left by the end of payday lending in Arizona. Lee Miller, an industry lobbyist with the firm Mario Diaz & Associates, said payday lenders were popular with many consumers precisely because credit unions couldn’t offer the services they wanted. Miller said he doesn’t expect that to change.

“What fabulous new thing are they going to roll out July 1 to try to capitalize on this market opportunity?” Miller asked sarcastically.

Miller said the demand for payday loans is real and isn’t going away. The people who use them do so because they have no other options, he said. They need quick cash, and have largely learned through trial and error what it costs to bounce checks and surpass the limits on their credit cards.

It’s hard to guess exactly what type of legislation payday lenders will propose in the future, Miller said, but the issue almost certainly will be revisited in 2011 or 2012.

“You probably will have folks come back to the Legislature and say, ‘You didn’t like payday. How about this?’ Lord knows what ‘this’ is. That’s what entrepreneurialism is all about,” Miller said.

Payday lenders can come back to the Legislature anytime they want, but if the events of the past two years are any indicator, they’re going to need a different game plan.

Proposition 200, a 2008 ballot measure that would have enacted new regulations on payday lenders while eliminating their sunset date, failed 60 percent to 40 percent, despite the millions of dollars that the industry pumped into the campaign. The industry joined national legislative groups and packed the membership rolls of numerous chambers of commerce to drum up support.

This year, despite hiring at least 20 lobbyists and consultants, the industry was never able to gain enough support for three separate bills that would have allowed it to continue operating. One bill failed in the Senate Appropriations Committee, while two others had so little support that their sponsors didn’t even bother to bring them up for a vote.

Industry lobbyists aggressively courted lawmakers they thought could be turned. Sen. Ed Bunch, who took office in February after he was appointed to replace former Sen. Jim Waring, said he met three times with industry representatives over payday loan legislation, but was never swayed in his opposition.

“It’s amazing to me how many times a stake had to go through its heart before it died,” said Bunch, a Scottsdale Republican. “I think I had three different meetings, and the third time it was sort of like, what part of ‘no’ are you having trouble with?”

Some lawmakers were wooed with incentives aimed at winning them over. Rep. Cloves Campbell, a Phoenix Democrat who opposed reauthorization after initially supporting it, said he met with industry representatives and suggested they speak with community leaders in areas with high concentrations of payday loan stores. Campbell and those leaders suggested that industry proposals include a community reinvestment plan, which would have diverted industry money into financial education programs and organizations like the Salvation Army.

Such a proposal was included, but later removed, from a reauthorization bill that failed in the Senate Appropriations Committee in March. Had the bill reached the House, Campbell said it still may not have been enough to gain his support, despite the obvious need for such services in his district, if the industry fought other reforms that he and other lawmakers asked for.

“You know how this hustle is,” Campbell said. “Everybody takes something out when they give you something else.”

Sen. Paula Aboud, another payday loan opponent, said the industry has exhausted its options for the current legislative session. And any future attempts at reauthorization will be met with the same fierce opposition that defeated Proposition 200 at the ballot box and three bills in the Legislature, two of which never even went up for a vote because they lacked support.

“They’ve got to start all over again,” the Tucson Democrat said. “We stopped them at every turn.”

(click on any of the hotspots to view information about the payday loan stores throughout Arizona)

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