For many families in Arizona, the “Great Recession” is far from over. Continued bureaucratic meddling and poor policy decisions by our elected leaders have made it difficult for many hardworking taxpayers to make ends meet. For some families the situation is so dire that one unforeseen financial hardship (car trouble, leaky roof, etc.) could prove catastrophic, especially if the family lacks access to credit or other borrowing options to pay the bill.
That is why it is important for Arizona to expand the legal lending options for those struggling with access to credit. Unfortunately, 35 other states, including Texas, Utah, California, Nevada and Colorado, have far more consumer lending options than are available in Arizona.
That’s right, even regulatory-friendly California has more choice and lending options than Arizona. House Bill 2611 addresses this problem head-on by permitting consumer “flex loans.” A flex loan is like a line of credit with a $3,000 maximum cap, and the borrower has to demonstrate the ability to repay the loan. In other states that have this product the average loan is approximately $1,000 and is paid off within a few months’ time frame.
These loans fill an important void in the Arizona market. They provide needed funds to working families that banks aren’t serving. Banks traditionally do not make smaller dollar loans, and banks generally don’t lend to families with lower credit scores.
Why would a business friendly state such as Arizona restrict lending options that would bring competition to this marketplace and is essential for struggling consumers? The major reason is the misconception that by restricting these types of credit options we can protect our residents from making bad lending decisions.
Unfortunately, both empirical evidence and common sense have proven that the opposite in fact occurs. Several studies have been conducted on short-term lending and the results have been the same: demand is not reduced when states reduce or limit access to credit or short term loans. Instead, movements to ban short- term lending options such as “flex loans” have only driven borrowers to offshore or certain untraceable, unlicensed online options, or illegal lenders. These types of underground options are dangerous and offer no protections to our most vulnerable residents.
The only other legal option a borrower with a lower credit score is to put his or her car or TV down as collateral in a “pawn” transaction while others turn over their auto title and a set of their car keys for a “title” loan. This is great for borrowers with some collateral, but it is not an option for many borrowers.
Flex loans provide a lifeline that gives many borrowers the opportunity to make ends meet or even improve their credit scores. It also gives the state’s economy a needed boost by making such loans available to a much greater number of Arizonans. And it creates more jobs in the state’s lending industry. Right now members of the Arizona Financial Choice Association employ more than 1,200 people in 90 locations. HB2611 would greatly increase that number.
For Arizona’s economy to operate at full speed, our lawmakers need to release the parking brake and allow lenders and borrowers to conduct business in an open, free market setting with competition and transparency. HB2611 accomplishes this goal while providing a much needed lending option to Arizona residents who need it most.
–Scot Mussi is president of the Arizona Free Enterprise Club.