The Arizona Republic
The Arizona Republic
The payday-loan industry, which flourished this past decade on Arizonans’ almost-insatiable need for quick, short-term loans regardless of their high interest rates, may have to close down in Arizona unless state lawmakers can be persuaded to ignore voters’ wishes.
Voters last week overwhelmingly rejected Proposition 200, a ballot initiative financed and written by the loan companies to allow them to continue charging high interest rates on small loans. That decision placed Arizona among a growing number of states that have effectively shut down the payday lenders.
But an industry spokesman said payday-loan stores could be wiped out because they cannot afford to operate on the lower rates they will eventually be forced to charge.
Critics who opposed Prop. 200 say payday-loan stores prey upon the poor.
The measure would have allowed payday lenders to charge interest rates up to 391 percent and indefinitely extend their state licensing, which expires July 1, 2010. In return for the extension, lenders would have slightly reduced fees, stopped loan extensions and created repayment plans.
Without a payday-lending license, businesses can charge only up to 36 percent annual interest, the maximum allowed for consumer lenders, according to the Arizona Department of Financial Institutions.
“We are still absorbing the loss and trying to figure out the best tactic to take to preserve the business,” said Stan Barnes, spokesman for Yes on 200.
Barnes said about 2,500 Arizonans will be out of work if payday lenders are shut down.
“There is a lot at stake,” he said. “It’s not every day we eliminate an entire industry.”
The payday-loan industry, which has been unsuccessful the past few years in getting lawmakers to extend the 2010 licensing deadline, pumped more than $14 million into Prop. 200 and ran myriad TV ads. The opposition spent roughly $175,000.
A payday loan is a short-term cash advance given to a borrower who promises to repay the loan plus a fee after the next payday. They are easy to obtain: A borrower needs only a checking account and a steady job. Loans up to $500 are available instantly.
Payday-loan supporters say they are needed for people who face an immediate money crunch. But critics say payday lenders get users into a debt trap because many borrowers can’t repay the loan in a few weeks, causing them to extend the loan with additional fees.
In the past eight years, the industry in Arizona has gone from virtually no payday stores to 637, although the growth declined the past two years because of saturation.
In 2000, lawmakers allowed the licensing of “deferred presentment companies,” or payday lenders, after intense lobbying from the industry. They were allowed to charge fees on a two-week loan that had the equivalent of an annual interest rate as high as 460 percent.
Barnes said if payday lenders had to abide by the 36 percent cap, it would amount to roughly $1.36 in revenue for every $100 loaned, which he said “can’t keep the lights on in the stores.”
Currently, state law allows payday lenders to charge up to $17.65 for every $100 loaned.
Sen. Debbie McCune Davis, D-Phoenix, opposed Prop. 200 and has steadfastly fought payday lenders. She sees no need to let payday lenders continue to charge higher interest rates than other lenders.
Yet, McCune Davis expects a fight once lawmakers convene in January.
“I suspect they will have their lobbyist down here testing the water to see if the Legislature will override the public and give them a second lease on life,” she said. “But I thought the public made their intentions pretty clear.”
McCune Davis said payday lenders for the past two years have tried to get lawmakers to extend the 2010 “sunset date” on licensing but have been unsuccessful because the industry wasn’t willing to significantly drop the interest rate or extend payment plans.
Arizonans in all 15 counties rejected Prop. 200, and it failed by nearly 60 percent to 40 percent.
Carol Hammerstein of the North Carolina-based Center for Responsible Lending said Arizonans followed a national trend that’s developed the past few years as 15 other states implemented interest-rate caps of about 36 percent.
On Nov. 4, Ohio voters rejected a measure sponsored by the payday-loan industry that would have overturned a new state law that cut the annual interest rate to 28 percent.
Hammerstein, who monitors payday lending nationally, said Congress passed legislation in 2006 that capped payday-loan interest rates at 36 percent for military personnel. And there could be additional trouble for payday lenders as President-elect Barack Obama promised to cap interest rates at 36 percent.
Barnes, who ran the Prop. 200 campaign, said he understands the mood of the electorate but said demand for payday loans is not going to evaporate.
“Where’s it going to go, the Internet?” Barnes said.
“There are thousands of Arizonans who will find them.”
SHUTTING OUT PAYDAY LENDERS
Arizona could join 15 other states that have passed legislation that effectively bans payday lenders.
Those states, according to the North Carolina-based Center for Responsible Lending, are: Arkansas, Connecticut, Georgia, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, North Carolina, Ohio, Oregon, Pennsylvania, Vermont and West Virginia.