Prop 200 debates payday loans

Supporters of Proposition 200 say the measure means real reform for the payday loan industry in Arizona, but opponents claim the measure will trap borrowers in a never-ending cycle of debt.

"It could be called the 'should we reform payday lending and keep it as an option, or eliminate it completely' proposition, because that is what is at stake," said Stan Barnes, chairman of the Yes on 200 Committee.

Also known as the Payday Loan Reform Act, the Nov. 4 general election measure would allow the payday loan industry to continue practicing business in the state indefinitely.

Currently the payday loan industry is regulated by the state and the provisions that allow the industry to operate in Arizona are set to expire on July 1, 2010. Those provisions were established in 2000.

A payday loan is a small, unsecured, cash advance that is usually repaid on the borrower's next payday.

The proposition says a "yes" vote shall have the effect of repealing the July 1, 2010, termination date for the existing "payday loan" licensing program, thus allowing it to continue indefinitely.

It would allow payday loan licensees to provide electronic debit agreement services, prohibit services over 35 days, require payday loan agreements be in English or Spanish, prohibit certain fees and permit only one payday loan transaction with a customer each business day.

It would require a payment plan if requested by the customer, prohibit arrangements with customers having outstanding repayment plans, allow licensees to make other loans and require licensee applicants to maintain a minimum net worth of at least $50,000 per location up to a maximum of $1 million.

A "no" vote would keep the current law regarding payday loans, which are to terminate on July 1, 2010.

Ken Clark, campaign manager of No on 200, said conspicuously missing from Prop 200 is any mention of repealing the current payday loan provisions in state statutes, which allow the industry to charge more than the 36 percent interest rate cap that applies to other consumer lenders in the state.

"Those laws sunset in 2010 and (payday lenders) haven't been able to get any new laws passed. They want this proposition to pass because they know when something makes it into law it is almost impossible to get rid of," Clark said.
"The payday loan industry is really a big shell game. They don't want to the Legislature to regulate them. The Legislature, Republicans, Democrats and the governor have all recognized they are loan sharks."

While fees payday lenders would be allowed to charge would drop from $17.65 to $15 on a $100, two-week loan, Clark said, Prop 200 essentially lowers the interest rate paid on a two-week loan from 458 percent to 391 percent.

"It is true, it does lower the interest rate, but it is still insanely high," Clark said.

Clark explained that most borrowers have to extend their loans at least five times - with the average borrower at least eight times - meaning they end up paying more in interest than they initially borrowed.

"The average borrower will pay back nearly $800 on a $300 loan, after multiple renewals," Clark said.

Opponents argue that if a borrower extends the loan multiple times - for example, a year - the fees added each time would equal 391 percent in interest.

He added that is why 15 states and the District of Columbia have passed laws enforcing interest rate caps of 36 percent or less, and Congress has prohibited payday loans above the 36 percent interest rate to members of the military.

Clark also said that borrowers aren't told about payment plans other than the normal requirement to pay back the loan in full on payday or renew it again, thus paying more fees.

"(Payday lenders') business models are built on borrowers not knowing they have repayment options available to them," Clark said.

Barnes said Prop 200 contains a dozen or more changes to the current laws that are pro-consumer, especially when it comes to the borrowers being able to pay back their loans.

"The payday lender has a tremendous interest in being repaid, so it is in their best interest to inform the borrower about repayment options," Barnes said.

Under current laws, he said, if a borrower can't pay off a loan amount in the required time, it is illegal to charge him or her another fee to extend it.

Barnes went on to say 200 provides a no-cost repayment plan for those customers who cannot meet their obligations.

He explained that if a borrower can't meet their financial obligations within the two-week payback period, 200 requires that the repayment amount be split into four equal payments and paid out of their next four paychecks.

Also, 200 contains provisions that prevents lenders from issuing another loan to a borrower for 24 hours after they pay off a loan.

Another concern Clark has with Prop 200 centers on electronic fund transfer, which he said gives payday lenders debit access to their borrower's bank account. He said that would facilitate overcharging through continuous fees.

"These are people who can barely pay their mortgages or other bills in the first place and now the lenders are getting their money straight from their bank accounts, which could cause the borrower even more financial hardships," Clark said.

Barnes argues the electronic funds transfer allows lenders the same ability to conduct transactions as banks.

Other supporting arguments for 200 are that it requires Internet lenders to be licensed in the state and enacts tough new regulations to crack down on unscrupulous operators.

Another opposing argument against Prop 200 is that closing payday loan stores would not hurt the economy as supporters claim it would.

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James Gilbert can be reached at jgilbert@yumasun.com or 539-6854.