Three years of work by a Tucson lawmaker to regulate payday lending in Arizona that had produced a deal with the industry fell apart in a committee hearing after legislators learned the state has been licensing Internet lenders for nearly a year.
The result, Rep. Marian McClure said, is that her deal with the state’s payday lenders will likely die.
“It makes me a little bit sick to my stomach, quite frankly,” she said. “I don’t know what to do now — period.”
McClure said she abandoned payday-lending legislation for the year and will focus on eliminating the industry entirely by working to preserve the automatic repeal of payday lending, scheduled for July 1, 2010, that is currently in statute.
A major facet of a strike-everything amendment that McClure, R-30, was working to attach to S1446 was a provision that would have prohibited all Internet payday loans to Arizona residents. Many of the lenders offered loans that violated Arizona law by either charging a higher fee than prescribed by statute or allowing consumers to borrow more money than the law allows. The Department of Financial Institutions, which regulates brick-and-mortar payday lenders, told her there weren’t any licensed online lenders in the state.
However, about 90 minutes before S1446 was heard in the House Financial Institutions and Insurance Committee on March 19, McClure learned the state has licensed six Internet lenders, contrary to what she had been told by the Department of Financial Institutions. She told the committee she hadn’t yet had time to investigate the matter and was unclear how the online lenders met the statutory requirement of receiving a paper check from the borrower before giving them the loan.
“The Internet transactions opens up a whole other bucket of worms that we need to study and debate,” she said. “I guarantee you not one person in the state of Arizona knew of Internet payday loans.”
Sarah Ketrona, general counsel for PayDay One, which is licensed to provide Internet loans in Arizona and 22 other jurisdictions, said the online lending prohibition would force her company from the state.
“That puts me out of business in the state of Arizona,” she said.
After the committee expressed an interest in protecting the lenders currently licensed for Internet loans, McClure told the committee she was unsure if she could reach a compromise with the industry to permit online transactions. She urged the committee to vote on the bill, but Chairman Bill Konopnicki, R-5, opted to hold it until March 26.
“The intent was not to hurt people that had already gone through all the requirements the state has to become licensed,” he said March 21. “What she wants to do is what we’ll do, but you can’t discriminate against businesses that are already licensed and have gone through all the hoops.”
Kelly Griffith, deputy director of the Southwest Center for Economic Integrity, said she was surprised the deal fell apart. Though she was opposed to McClure’s bill as a whole, she supports banning Internet lenders.
“I don’t think the intention [of the current law] was to allow Internet payday lenders to get licensed,” she said. “It will be a nightmare to try to enforce any regulations on [Internet] payday lenders.”
Griffith said she hopes the bill is not heard again so she and McClure can work on reforming the industry next year.
“I hope that is just dies in committee…and we can get everyone who’s a stakeholder to sit down,” she said. “If we can’t come up with something, we just need to dig in our heels and hold on to that ‘sunset’ with all our might.”
The proposed legislation would have placed heavy restrictions on payday lenders, such as the creation of a fee-free repayment plan for borrowers and eliminating loan rollovers, in exchange for removing the automatic repeal, thus making the industry permanent.
McClure says part of the quandary she finds herself in is that the payday lending industry is now acutely aware it can get licensed to do business online – something they asked for in their negotiations with her that she flatly rejected.
“Now I’m doubly worried about getting rid of the sunset provision because I don’t know what else is out there,” she said. “Pandora’s Box has just been popped wide open.”
And while McClure says the idea of just biding her time until the laws that enable payday lending expire in three years is tempting, she doesn’t think that will be the end of the line for Arizona and the payday lending industry. A similar effort in South Carolina resulted in a seven-year court battle the industry eventually lost.
“If [we] do repeal it, they won’t go gracefully,” she said. “They’ll fight tooth and nail through the courts.
“If [payday lending] lasts another 10 years, that’s not right, either, is it?”
S1446 is scheduled to be heard March 26 in the House Financial Institutions and Insurance Committee.