Nearly a decade after Arizona voters outlawed “payday loans,” the lending industry is trying to get its foot back in the door with a new type of high-interest consumer loan.
And they’re getting the help of Republican legislators.
Legislation approved by the Senate Appropriations Committee would legalize what proponents have dubbed a “Consumer Access Line of Credit,” which would provide for revolving loans of up to $2,500.
But the most significant provision of HB2496 is it would permit lenders to charge what proponents call a “daily transaction fee” of 0.45 percent per day, a figure that computes out to an annual percentage rate in excess of 164 percent. By contrast, state law caps interest on most other loans at just 36 percent a year.
The 6-4 vote along party lines in the Republican-controlled committee sends the measure to the full Senate. The House has never considered the measure.
Sen. Debbie Lesko, R-Peoria, said the elimination of payday loans has left a need.
“There are people out there that don’t have good credit,” she said, making it difficult for them to get money in an emergency situation, like ensuring that the power doesn’t get turned off.
“They have no other options,” Lesko continued. “They don’t have family here that can lend them money.”
That’s also the assessment of Michael Kerr, who lobbies for Enova International, one of the firms seeking to offer these loans in Arizona.
He said about 850,000 Arizonans have a credit score of 599 or less on a scale of 300 to 850, and they cannot get traditional loans at 36 percent interest or less.
“We think that that market is not being adequately served,” he told lawmakers.
But Tucson attorney Mary Judge Ryan said the actual language of the bill belies the contention by Lesko and others that this kind of loan is designed to help people with emergency situations. She pointed out that the actual measure itself says the lender “contemplates repeated noncommercial loans for personal, family or household purposes.”
Joshua Oehler of Children’s Action Alliance said the legislation would create a “debt trap” for people who would borrow the $2,500 maximum, continue to pay just the minimal amount and then borrow again as they paid down the loan.
Ellen Katz of the William E. Morris Institute for Justice questioned whether there’s really a need for this type of loan. She said the Arizona Department of Financial Institutions has 10 pages of firms willing to lend money to Arizonans under the current interest limits.
But Sen. John Kavanagh, R-Fountain Hills, said that ignores reality.
“These 36 percent loans don’t exist for people in these situations,” he said. “This is a lifeline.”
Not everyone who voted for the bill was happy with it.
Sen. Sylvia Allen, R-Snowflake, said she believes people should be able to make their own decisions and be responsible for their actions. She said that includes borrowing money.
But Allen noted testimony from industry lobbyists, who said they offer these types of loans in other states for far less than the 164 percent they want to be able to charge here. Allen said she might oppose the measure when it reaches the full Senate, unless that cap is reduced.
Katz also pointed out something else.
In 2008, voters repealed by a 3-2 margin an earlier exception to that 36 percent interest cap, which allowed what were known formally as “deferred presentment” loans but came to be called “payday loans.” Fees for the typically two-week renewable loans amounted to 450 percent annual interest.
The industry shut down in 2010.
“I think that needs to be remembered,” Katz told lawmakers.
Lesko, however, said this is better than those payday loans because lenders would be required to report successful repayment to credit bureaus. She said that would help people build up a credit record so they eventually can borrow from someone else, at a much lower rate.
Kathy Jorgensen of the St. Vincent de Paul Society called the current loan proposal “predatory.” Kavanagh, however, said he sees the plan as a sensible way to get money.
For example, he said, a painter might need to borrow $1,000 for two weeks to complete a job. Kavanagh cited estimates by Kerr that such a loan would cost $70, saying he considers that to be quite reasonable under the circumstances.
But Sen. Olivia Cajero Bedford, D-Tucson, said the business model for these lenders is not based on one-time loans but instead on getting people to borrow money, remain in debt and make payments.
This isn’t the first time that lenders, with the help of Republican lawmakers, have tried to get a new exception to the 36 percent interest cap.
In 2015, a bill by Rep. J.D. Mesnard, R-Chandler, sought to create “flex loans.”
Technically, they would have lived within the 36 percent usury limit.
But lenders would have been able to charge a series of fees for everything from maintaining account information, validating customer information, processing transactions and providing periodic billing statements.
And on a maximum-allowed loan of $3,000, that could be up to $15 a day in fees in addition to that 36 percent interest.
Last year’s proposal, sponsored by Kavanagh, would have allowed lenders to charge up to 15 percent a month – 17 percent if there’s no collateral – on loans between $500 and $2,500 for terms between 45 days and two years.
Both measures were defeated.
There was another objection raised Tuesday by some to what Lesko proposed: the process.
Rather than introduce a bill at the beginning of session and have it go through the normal process, lenders got Lesko to graft the language onto an unrelated House-passed bill dealing with homeowners associations. That’s not only more than two months since the Legislature began its annual session but 72 days into what’s supposed to be a 100-day session.
It also means that the legislation, if it is approved by the Senate, will not get a hearing in a House committee. Lesko brushed aside those concerns.
“I think there’s going to be plenty of time for debate, especially since you’re reporting it,” she responded.