Saying the demise of payday lending left a gap, a veteran legislator is proposing a new kind of consumer loan, one with higher interest rates than now allowed.
Rep. Jim Weiers, R-Phoenix, said the 2008 decision by voters to kill payday lending in Arizona left a "huge void" in the market, particularly for people whose credit history does not give them access to more traditional sources of borrowing. What's left, he said, is having to pawn some items or going to an unregulated and illegal loan shark.
But Rep. Debbie McCune Davis, D-Phoenix, said what Weiers is proposing in HB 2550 is little better than the high-interest, short-term loans that voters rejected.
"The bill is just one more form of predatory lending," she said. "The sponsor of the bill seems to have missed the election in 2008 when the voters said ‘no' to triple-digit interest rates."
The measure is set for a hearing Wednesday before the House Commerce Committee, which Weiers chairs.
Arizona law generally caps interest on loans at an annual rate of 36 percent.
In 2000, though, legislators agreed to create an exception for what were technically called "deferred presentment transactions."
A borrower would write out a check that the lender, knowing it could not be covered now, would agree not to cash for up to two weeks in exchange for a fee of $17.85 for each $100 borrowed.
That translated out to an annual percentage rate of more than 400 percent.
That 2000 law, however, provided for only a 10-year experiment. Lawmakers refused to extend the law and a heavily financed initiative by the payday lending industry also fell short.
The lenders shuttered last June 30.
Weiers said that left a gap.
"If you have a car that needs $600 in repairs and you don't have the $600, then you go down and get a rental car for $19 a day," he said. "At the end of the day ... you still don't have a car and you still have to get the car fixed."
Weiers said banks aren't providing those small loans, especially because they are not secured by any collateral.
At the same time, he said it's harder to get credit cards. And those who have cards are finding their borrowing limits reduced.
What Weiers is proposing is new rules for loans of between $200 and $3,000.
Interest rates would be on a sliding scale, from 4 percent a month for the first $750 up to 1 percent for anything between $2,250 and $3,000. On top of that, lenders could charge an acquisition fee of up to 10 percent of the loan or $75, whichever is less.
These loans can be renewed up to three times. And companies that give these loans cannot provide more than one loan at a time to any borrower.
Weiers said those kinds of limits should preclude the kind of abuse and financial problems created by payday lending, where individuals got stuck in a cycle of debt, taking out one loan to pay off another.
McCune Davis, however, is not convinced.
"These companies train their people to roll the loans over before they're paid off," she said. "They literally move the balance forward into a new loan so the consumers pay that interest over and over again. That's part of the problem."
She also rejected Weiers' contention that people who don't have bank accounts, good credit and credit cards need options like this. McCune Davis said there already is one: joining a credit union which has to live within the current interest rate caps.