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H2161 locks in 391% interest for payday lenders

As Robert Merry notes in his book “A Country of Vast Designs,” President Andrew Jackson wrote in an 1832 veto letter, “In the full enjoyment of … the fruits of superior industry, economy, and virtue, every man is equally entitled to protection by law; but when the laws undertake to add to these natural and just advantages artificial distinctions … and exclusive privileges, to make the rich richer and the potent more powerful, the humble members of society… have a right to complaining of the injustice of their Government.”

So it is with H2161, the attempt to reverse the public vote of 2008 and provide artificial distinctions and exclusive privileges to the payday loan industry through the reinstitution of its exemption from the state’s usury cap.

At the Greater Phoenix Chamber of Commerce public affairs meeting Jan. 22, H2161 proponent Grant Woods suggested that the enforcement provisions of the bill would likely force the “ma and pa” payday loan companies, a small fraction of all payday lenders in the state, out of business. While a remarkable admission, the real meaning of his remark is that the legislation will create a closed-shop oligopoly contrary to open-market principles. It will artificially control entry and exit into the industry.

More importantly, the statutory provision setting an annual percentage rate of 391 percent gives large payday loan companies a guaranteed rate of return without the application of any rate-of-return regulation. There is little evidence of any other industry that has such an advantageous position, let alone in financial services.

In fact, in the financial services industry, interest rates generally respond to economic circumstances. When the monetary supply goes in a particular direction, the interest rates are adjusted to reflect that movement. When the Federal Reserve sets interest rates, corresponding changes occur in the marketplace. By the industry’s own admission, payday loans do not respond to the marketplace or to the Federal Reserve rates – or for that matter to any economic circumstances.

If the Legislature approves an extended exemption from the state’s Consumer Loan Act allowing payday lenders to charge 391 percent, it will have locked into statute a permanent and artificial rate. Period.

Taking all this into account, we can only conclude that H2161 – or any amended legislation that locks in rates above the consumer loan cap of 36 percent – is protectionist legislation granted to a large corporate oligopoly in clear violation of the free market and economic principles.

The precedent that would be set by this is nothing short of breathtaking. We can only imagine what other industries would seek this type of protected status if the payday lenders are successful.

The payday lenders have suggested that if they go out of business as a result of no longer enjoying protected status in state statute, there will be a loss of $80 million in tax revenue to Arizona. A review of the major payday loan companies’ SEC filings indicates that this figure is an extrapolated aggregate of federal, state and local taxes, with a vast majority attributable to federal taxes.

More importantly, it fails to take into consideration the $150 million a year in fees taken out of Arizona by these out-of-state payday loan companies. How much money is the state willing to have drained out of consumers’ pockets to bolster corporate coffers of out-of-state interests, particularly because it is money that can no longer be spent on local goods and services?

Likewise, the payday lenders overstate their claim that thousands of jobs will be lost. In fact, payday loan companies already experience extremely high rates of attrition, with more than 80 percent annual turnover in employment.

Robert Merry’s point about President Jackson is that he “wished merely to ensure that the levers of government were not used to bestow special beneficence upon a well positioned few.”
His views are as appropriate today as they were then.

– Barry M. Aarons is the owner of The Aarons Company LLC and represents Arizonans for Responsible Lending, a coalition of more than 200 organizations opposed to the extension of 400 percent payday lending in Arizona. He is also a senior research fellow for the Institute for Policy Innovation, a free-market think-tank located in Lewisville, Texas.


  1. Well stated. I hope our legislators are listening.

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