Thanks to a bevy of unflattering media reports, there are probably few industries as vilified as the Arizona payday loan industry. Still, those who provide small, short-term loans offer a valuable service, and the government is wrong to trample on it.

The payday loan process is rather simple:

• A person in need of a small, short-term loan writes a check for the amount they need, plus a 15 percent fee. The check is usually dated two weeks in the future, at which time the loan (and the 15 percent fee) must be repaid in full. If the person is unable to pay, the payday advance loan lender “rolls over” the loan, charging the 15 percent fee all over again.

Most of the criticism of payday lenders has focused on the interest rates and the “rollover” mechanism. Over the course of a year, a payday lender’s interest rates can amount to an annual rate of 390 percent, while the rollover mechanism makes it exceptionally easy for uninformed customers to quickly become mired in debt.

So, several states have sought to curb what has been deemed a “predatory” business practice. According to The Wall Street Journal, lawmakers in New Mexico limited loan amounts to 25 percent of a customer’s monthly income, while Oregon is set to cap the amount of fees and interest faxless payday loan lenders can charge.

Here in Arizona, lawmakers have shied away from regulating payday lenders, but state Rep. Marian McClure, R-Tucson, is marshalling forces to put a proposition on the 2008 ballot that would effectively put the payday loan industry out of business. Telling the Arizona Daily Star that [fast payday loans] are “dangerous,” McClure wants the proposition to cap annual loan rates at 30 percent, which would likely put payday lenders out of business.

While the urge to protect customers from payday lenders might seem noble, closer inspection would suggest that it’s a bad idea.

What McClure and state legislators elsewhere fail to realize is that cash loan online lenders serve an important market: people who lack the assets to bank with mainstream banks like Bank of America or Wells Fargo. That’s a large group, one that includes people below the poverty level, at least some of the 12 million illegal immigrants in America and probably even a number of UA students.

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Rep. Marian McClure’s initiative to place an interest-rate cap on payday advance loan lenders is a hopeful sign that Arizona yet may find a way to regulate these financial predators. But her initiative, announced Wednesday, won’t be on the ballot before the end of next year, assuming she gathers sufficient signatures.

In the meantime, the Arizona Legislature — no friend of meaningful regulation of high-cost loans — is on the verge of guaranteeing a lifetime of profits for payday lenders and continuing debt and financial hard times for their customer-victims.

Ironically, the harmful bill working its way through the Legislature was crafted by none other than McClure. Though claiming to restrict the predatory practices of the savings account payday loan lending industry, this bill offers only minimal improvement at a huge cost: It would eliminate the sunset provision in state law that would truly protect the poor and the desperate by closing down the industry in 2010.

Payday lenders operate by exploiting people who out of desperation or lack of sophistication enter into an agreement they have little hope of being able to keep. In a typical transaction, the payday company lends the borrower about $300, taking as collateral the borrower’s check. The borrower agrees to come back in two weeks to redeem the check.

For this, the firm charges a fee equal to 17.6 percent of the loan.

But most borrowers cannot keep their agreement. Typically, they have borrowed the money for necessities — their rent, mortgage, car insurance, groceries or an unanticipated car repair. People who need to borrow such relatively small amounts for necessities are unlikely to be able to pay back the loan in just 14 days.

The lenders not only know this, they count on it. Every two weeks, the loan is renewed — with the 17.6 percent fee compounding every time. The providers of cash advance loans claim to be seeing people through a moment of financial distress.

But in actuality the industry profits by trapping borrowers in a cycle of debt. Nationally, payday lenders make 90 percent of their revenue from borrowers who cannot pay off their loans when due, according to the Center for Responsible Lending.

McClure’s legislative bill would prohibit renewals of bad credit payday loans. But it fails to create an effective way to police that prohibition.

Moreover, a feature allowing borrowers who cannot repay the loan the opportunity to choose a repayment plan is less of a reform than it may seem. Similar laws in other states have had little effect, at least partly because the borrower must ask for the repayment plan within 14 days. McClure’s bill would be more realistic if it prohibited ultra-short loans and required all payday loans to be of at least 90 or 120 days duration.

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Convinced the industry can’t be properly regulated, a veteran state legislator is launching an initiative drive to wipe out Arizona payday loan lenders.

The proposal by Rep. Marian McClure, R-Tucson, would cap interest rates for short-term loans at an effective annual rate of no more than 30 percent plus the going “prime rate.” That is generally defined as the lowest interest rate that banks charge thei preferred customers, a figure that currently stands at 8.25 percent.

By contrast, no fax payday loan stores, with their two-week loans, charge interest and fees that, on an annual basis, can translate to close to 400 percent.The decision to go to the streets comes as McClure, long suspicious of these high-interest loans, has been unable to convince colleagues to impose strict new regulations.

A House panel has approved some alterations in the law. But legislators have been unwilling to ban payday loans online, a practice that McClure said is “as dangerous, if not more so, than Internet gaming.”

Lee Miller, who lobbies for the Arizona Community Financial Services Association, said interest caps will kill the industry.

“The price we charge is the price we have to charge to operat that business model in those locations and still make a fair profit,” he said.

Payday lenders actually don’t “loan” money but instead agree to accept a check they know is not good and hold it for up to two weeks. Payday cash advance borrowers can get up to $500, with the check written out for 15 percent more than that amount.

Miller said the effective interest rate payday lenders charge is much higher because these are short-term payday loans. By contrast, he said, even companies that issue a high interest credit card “get to charge you interest 365 days a year, year after year afte year, until you pay off your bill.”

And he said the industry constantly needs to find new customers.

“We have no expectation that we’re ever going to see you again once you’ve paid us off,” he said.

The bottom line, he said, is that the approximately 720 site operated by cash loan lenders fill a gap in the market.

McClure is unconvinced.

“What did they do before payday loans?” she asked, noting they were not legal until seven years ago. “They went to family members, they went to friends. Many times they went to employers and got th employer to give them an advance.”

And sometimes, she said, it just requires creativity.

For example, she said someone who needs a tire doesn’t have to buy an expensive new one but instead could get a used one, good for even just a couple of weeks, taking care of the immediate short-term need.

McClure is counting on volunteers to collect the 153,36 signatures she needs on petitions by July 3, 2008. But McClur said she already has taken the first steps to building that army.

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As we’ve discussed yesterday and in recent weeks, shops that offer quick cash loans for a fee are flourishing in Arizona.

But that could change, the Tuscon Citizen reports, if legislation to add consumer protections is signed by the governor.

The proliferation of payday loan stores in low-income neighborhoods and stories of consumers unable to climb out of debt because of exorbitant borrowing fees have legislators pushing for changes.

Among them is eliminating the ability for a consumer roll over an Arizona payday advance, limiting them to one loan at a time.

Also on the agenda is reducing the overall interest rates.

Last month, legislators got a step closer to eliminating some of the high costs of borrowing money for consumers who rely on payday loans when money isn’t able to cover bills.

The bill has a way to go. Industry insiders say the changes will shrink competition, reducing options for consumers needing an emergency payday cash advance.

But they aren’t balking as vehemently as with past efforts to curtail the industry, as this bill provides a long-term home in Arizona. Licensing that allows for payday loans to be made in Arizona is set to expire July 1, 2010.

“If the sunset date isn’t changed, nobody knows what will happen July 2″ of that year, said Lee Miller, lobbyist for the Arizona Consumer Financial Services Association, which represents payday lenders.

More than 700 payday advance loan branches and 98 offices are registered in Arizona. Six years ago, 27 home offices existed, but no branches.

Arizona didn’t recognize the payday loan industry until 2000.

That’s when the Arizona Legislature established rules for licensing these businesses offering up to $500 in short-term quick cash loans.

Key provisions eliminate rollover loans that lock consumers into long-term debt, allow payday loan applicants to set up an easy, no-cost repayment plan and restrict back-to-back loans.

That ability to roll over payday loans and added fees creates an annual percentage rate (APR) of 491 percent in the state.

Continue reading in the Tucson Citizen …

Convinced the Arizona payday loan industry can’t be properly regulated, a veteran state legislator is launching an initiative drive to drive it out of the state.

The ballot proposal by Rep. Marian McClure, R-Tucson, would cap interest rates for short-term loans at no more than 30 percent plus the going prime rate, which is generally defined as the lowest interest rate banks charge preferred customers.

By contrast, cash advance stores, with their two-week loans, high interest and loan roll-over fees, charge rates that can translate to close to 400 percent on an annual basis. The decision to take her campaign to the streets comes as a result of McClure’s inability to persuade her legislative colleagues to impose strict new regulations.

A House panel approved some alterations in the payday cash loan law. But legislators have been unwilling to ban payday loans offered over the Internet, a practice McClure said is “as dangerous, if not more so, than Internet gaming.”

To offset legislative intransigence, McClure, a former president of the Arizona Federation of Republican Women, is putting together a bipartisan coalition of volunteers to gather the 153,365 petition signatures she needs by July 3, 2008, to put the issue on the ballot.

In addition to the 3,000- member state Republican women’s group, McClure said she already is talking with the group’s Democratic counterpart.

Cynthia Fagyas, spokeswoman for the Arizona chapter of AARP, said her organization is also interested in pursuing the issue, though members want to see the final version of the faxless payday advance initiative. And McClure is counting on support from such groups as Arizona Community Organization for Reform Now, which helped put the $6.75-an-hour minimum wage on the 2006 ballot.

Lee Miller, who lobbies for the Arizona Community Financial Services Association, said interest caps will kill the industry.

“The price we charge is the price we have to charge to operate that business model in those locations and still make a fair profit,” he said.

Providers of no faxing payday loans actually don’t “loan” money but instead agree to accept a check they know is not good and hold it for up to two weeks. Borrowers can get up to $500, with the check written out for 15 percent more than that amount.

Miller said the effective interest rate payday lenders charge is much higher because these are short-term loans. By contrast, he said, even companies that issue a high-interest credit card “get to charge you interest 365 days a year, year after year after year, until you pay off your bill.”

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Ken Compton is the chief executive officer of Advance America, the nation’s largest provider of payday advances. The company, based in Spartanburg, S.C., operates approximately 2,800 payday lending centers in 36 states, including Arizona. This Guest Opinion appears online only and not in the Tucson Citizen’s print edition.

Critics of the payday advance industry would like you to believe that unsophisticated consumers are lining up for cash advances only to be trapped in a debt spiral that pulls them deeper into financial peril.

Not a pretty picture to be sure - but not an accurate one either.

The truth is that most of our customers use payday cash advances responsibly, allowing them to overcome unexpected financial circumstances.

These individuals appreciate having access to a product that, with its comparatively low one-time fee, makes more sense than the burdensome costs and other consequences related to bouncing a check, missing a credit card payment or neglecting an outstanding bill.

According to state regulator reports, more than 95 percent of payday loans are ultimately paid and more than 90 percent are paid when due.

And contrary to the misinformation spread by industry critics, a payday advance must be paid back within a specified time period (typically two weeks), and the fee does not compound interest.

Millions of consumers choose to avoid excessive credit card late fees and interest, record high nonsufficient funds fees and other punitive costs for missed payments by utilizing our service.
Consumers are well aware of their options and discerning enough to make financial decisions that best serve their interests.

And contrary to our opponents’s exaggerated rhetoric, it is not our intention to undermine the financial health of our customers by offering consecutive cash advance loans on which the amount increases so much that they are unable to resolve them.

A recent staff report from the Federal Reserve Bank of New York concluded that instant cash loans are not a form of predatory lending - as some of our critics contend - and instead can help consumers by increasing credit.

In addition, the report asserts that consumers appear to be sophisticated enough to seek lower prices for credit products and finds that some of those who use payday advances do so to avoid missing other payments. (more…)

Interest rates on Arizona payday loans would be severely limited under a bill getting its first hearing today at the capitol.

Sponsor Marian McClure doesn’t like the businesses, but believes they are necessary. Her bill would eliminate the loan rollovers that boost cash loan online interest rates to stratospheric levels.

“Without payday loan stores, I believe we will go back to what we had before, which were loan sharks,” she said.

On the plus side, since payday cash advances were legalized seven years ago, McClure says she hasn’t heard of anyone getting their legs broken.

Her bill would also ban Internet payday lenders.

“That if you make an [online payday loan] in the state of Arizona, the transaction is void and you have no right to the principal or the interest. That should stop them, would you not think?”

McClure says there are already six companies in the state doing payday loans over the Internet. She hopes to regulate them, as well.

Maybe you’d like a new way to take out a small payday cash loan without resorting to a shady lender.

The House has given tentative approval to personal loans up to $1,500 dollars, but instead of interest, you’d pay an upfront fee and a monthly handling charge.

Scottsdale Republican Michelle Reagan is the sponsor.

“It is a true free-market approach to reforming [pay day loan] lending,” Reagan said. “You keep hearing a lot of people in here say they want to reform the pay day loan process. Well, how can you when there’s no other options out there?”

Payday loans can exceed 300 percent interest. This type of loan tops out at around 130 percent. But Democrats say it’s just another way to exploit poor people with sub-par credit.

“We’re going through this whole pay day lending debate right now where we have these pay day lending markets all over our neighborhoods and now we want another type of lending institution to come in that provides similar types of loans,” said Democrat Steve Gallardo.

The following is a paraphased editorial from The Arizona Daily Star …

Arizona lawmakers should look at what has happened in other states before compromising with payday lenders. What they’ll find is that reform measures elsewhere have failed to help vulnerable consumers escape the cycle of debt that is often exacerbated by taking out a payday loan.

A measure introduced this week by state Rep. Marian McClure, R-Tucson, promises to give consumers more protection and make short-term, high-interest instant payday loans more affordable. But in return, the legislation, SB 1446, would lift a provision from existing law that would effectively put payday lenders out of business in 2010.

If the experiences of other states are any guide, however, the reform measures in McClure’s bill won’t make much of a difference. Worse yet, getting rid of the expiration, or sunset, provision in the law will ensure that this form of predatory lending remains in the state forever.

Among the reforms in SB 1446 is a prohibition on renewing, or rolling over, faxless payday loans. A borrower who is unable to pay off a loan on time wouldn’t be able to take out a new loan, which can be done up to three times under existing law.

To help consumers, the bill calls for a three-month repayment plan. A borrower could at any point before the loan’s due date ask to be put into a payment plan. He or she would then have 90 days to pay back the loan without incurring new fees.

Borrowers who enter payment plans would have their names added to a state database to keep them from taking out another cash advance loan to pay off the first one — a practice common among financially strapped payday clients.

Another provision of the McClure bill would make borrowers sign a statement vowing that they don’t already have another payday loan outstanding. The trouble with the measure is that similar laws in Florida, Oklahoma and Washington state have not worked.

Oklahoma and Washington, for example, each offer payment plans after a certain amount of loan renewals, according to figures provided by the Southwest Center for Economic Integrity, a Tucson organization that fights predatory lending practices.

In Oklahoma and Washington, fewer than 1 percent of no fax payday advance borrowers take advantage of the payment plans.

Florida, Oklahoma and Washington also each prohibit rollovers, yet about 90 percent of payday loans in all three states go to borrowers who conduct five or more payday transactions a year, according to the Southwest Center for Economic Integrity.

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Here’s what the Tuscon Citizen has to say about the new bill regulating payday loans in the state:

Like Frankenstein rising from his slab, faux legislation on quick cash advance lending has risen again, this time as SB 1446.

But a law tailored by the very industry it would “regulate” won’t do Arizonans any good - unless they’re in the payday lending business.

This bill does exactly what these lenders want: It eliminates the sunset provision in the law that enabled the providing of payday advance loans in Arizona.

Who knew, back in 2000, the repercussions that would result when the Legislature exempted payday lenders from the state’s usury law? Well, legislators should have known. But at least that law included a provision to sunset in 2010.

The sun wouldn’t set, however, under this new “striker” bill by Sen. Chuck Gray, R-Mesa. Under the guise of compromise, cash loan lenders would continue preying on the poor as they pretend to bow to reforms.

Tucson Republican Rep. Marian McClure says the bill cuts annual percentage rates to about 55 percent from 400 percent.

Not so. Rather than charging $17.65 per $100 borrowed, the lenders would charge $15 per $100. On a two-week loan, that still amounts to 390 percent APR. SB 1446 also supposedly would eliminate rollover loans and cap the number of outstanding personal loans.

But it won’t, because the law puts the onus on the consumer to divulge other loans. A person strapped for cash simply won’t. And a new database wouldn’t track all payday loans; it would apply only to those people who enter a repayment plan.

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