Proposition 200: Payday Loan Reform Act

Sept. 24, 2008

Transcript:

Ted Simons:
>>> In 2000, payday loan companies started popping-up in Arizona after a law was passed authorizing them to operate differently than other lenders. As "horizon" continues its "vote 2008" series on the ballot propositions, we take a closer look at prop 200 also called the payday loan reform act. A debate on the merits of the proposition after David Majure shows us how payday loans work in our state.

Bank Worker:
>> How can I help you today?

David Majure:
>> They are almost every where you turn. Payday lenders and their promise of cash now.

Bank Worker:
>> based on your net income we can loan you 50 to $500.

David Majure:
>> Payday loans are meant for working people with a steady source of income.
Bank Worker:
>> I need to verify your bank account.

David Majure:
>> Customer writes a check to the lender for the amount of the loan plus fees and they hold on the to check in the customer's payday.

Tamara Sisk:
>> It's great to think I can run in and get this and tide me through until the next paycheck.

David Majure:
>> She took out her first payday loan in 2004 when her husband at the time was out of work and they were out of money.

Tamara Sisk:
>> It was $100 and fee was $15 on it. Relatively I could do that.

David Majure:
>> living with paycheck to paycheck with credit cards at their limit, Tamara took out more payday loans.

Tamara Sisk:
>> For a year on and off i would payoff and a come back. Things got tougher and bills started really piling up.

David Majure:
>> Pretty soon one loan wasn't enough.

Enrico Torres:
>> Whenever a consumer walks in to take out a loan, they are notified through a written agreement or orally that they can not have more than one outstanding loan out with a payday lender.

David Majure:
>> It's against the law so when she tried for a second loan, she watch sure what would happen.

Tamara Sisk:
>> Nothing happened. Here's your money. I was like oh, okay. So there's two loans i have out now that we're juggling and fees and different times and it just snowballed.

David Majure:
>> Before long they had nine loans totaling $3,000 with different payday lenders.

Bank Worker:
>> We lend at 17.5% and $17.50 for every $100.

David Majure:
>> Expressed as an annual percentage rate that's 455%. For banks and other lenders the apr is capped at 36%. But enrico of checkmate says it's unfair to annualize what amounts to one-time fee.

Enrico Torres:
>> These are short-term loans meant to meet short-term obligations. When you look at return check fees and late fees and money it take out money out of an A.T.M. there's not an annual percentage rate on that.

Tamara Sisk:
>> check into cash $588, checkmate $575.

David Majure:
>> Payday loans have turned into a revolving credit. By paying another fee she could extend three times each time. When a loan was due in full, she would take out cash and take out a new loan to cover other fees.

Tamara Sisk:
>> Other bills were not getting paid because all the money was going out to pay the fees. I started looking through the contracts then. I saw that it was 391% apr and I'm like, oh, my, gosh. I thought I was crazy when I paid 13% on a vehicle. 13%. Not 391%.

David Majure:
>> She blames herself for the financial mess she was in but she says the payday loan companies made it way too easy.

Tamara Sisk:
>> Until May of '05 when I filed bankruptcy.

Enrico Torres:
>> at some point people have to take financial responsibility for the decisions they make.

David Majure:
>> Used properly Torres says payday loans help people out of short-term financial emergencies.

Enrico Torres:
>> payday loans are cheaper alternative than paying return check fees with banks and other fees that both credit cards and banks charge such as late fees and overdraft fees and negative balance fees.

David Majure:
>> The state law that authorizes payday loans is set to expire in 2010. But proposition 200 sponsor by the payday loan industry removes that date. It's called the payday reform act and makes to current law. It limits fees to 15% of the principle amount borrowed and prohibits loan extensions and rollovers and allows a customer to request repayment plan giving them four days at no additional charge.

Enrico Torres:
>> The payday loan act is real and measurable and proconsumer.

Tamara Sisk:
>> I'm voting but no. Payday loans industry needs to be held to the 36% interest cap just like any other lender here in Arizona.

Ted Simons:
>> joining me to talk about proposition 200 is former state lawmaker and political consultant, Stan Barnes. He's representing Arizonans for financial reform, the "yes on 200" campaign; and Jean Ann Fox, director of financial services for the consumer federation of America. She's on the steering committee for Arizonans for responsible lending, the "no on 200" campaign. Thank you both for joining us on horizon.

Stan Barnes:
>> Good to be here.

Ted Simons:
>> Okay, Stan, why is this loan necessary?

Stan Barnes:
>> I get to go first, good. It's necessary because some large number of Arizonan want to vote yes on the reform package on the payday loan industry. If nothing happens the payday loan industry will be eliminated and this credit option will evaporate in the mark place. Those consumers which there are thousands of everyday of hard-working Arizonans will no longer have the options and left to bounce checks and other things that are more costly. In my 20 years in civic involvement in Arizona I've never seen an issue so upside down in the ratio of politics to fact. All issues have that kind of flavor because people spend. This is craziness the way this industry is attacked by people that don't really understand it or don't recognize that there is a real need in reforming the industry is better than eliminating it.

Ted Simons:
>> Why are you against the proposition?

Jean Ann Fox:
>> We're against proposition 200 because it really does not reform the payday loan product. The reforms that they have included in the seven-page bill that the industry--excuse me--did not curtail the debt trap that payday lending is for most consumers. 6% of payday loans go to people who are multiple loans. One in four go to people who have more than 21 loans in a year. This is not a one-time debt consumers. People pay them over and over and so expensive and due the next payday. The lender is holding the personal check that will bounce if you don't come in and renew or pay it off and take out another one.

Ted Simons:
>> does it address folks taking loan after loan and paying for loan after loan?

Stan Barnes:
>> It does. The initiative is drafted on the ballot answers every assertion made by opponents of the payday lending industry with the exception they don't like the rate which is going to go lower to $15 per 100. That clear and simple rate which is understandable by the payday loan customer is cheaper than the $54 you may pay to bounce the check or rehook fee for utility or overdraft credit card. That rate is still offensive to opponents who insist in describing in apr terms in order to scare voters and mislead voters. They tried to put in the description on the official document people would read. They sued to put 391% in there because they thought it would scare people. The secretary of state didn't agree. The attorney general of Arizona did not agree. They sued in court and the court did not agree with the 391% number saying the description written by the secretary state and attorney general was complete as it was. It's a difficult issue to deal with when opponents want to spread fear instead of facts.

Jean Ann Fox:
>> Well, that's a lot of points to answer. First of all this ballot initiative would authorize 24, two-week loans per year mer customer. It does not stop repeat borrowing. It says wait 24 hours and come get a loan. Most are taken out on the same period. If people pay it off on payday, they end upcoming back and getting more because they have run out of money. These must be quoted with the annual percentage rate. That's required by the truth and lending act and law of the land for 40 years. Federal Reserve specifically said that payday loans were subject to truth and lending and the cost of them has to be stated as the annual percentage rate or dollar finance charge. Stan likes to talk about $15 per 100. It's really 391% for the typical two-week loan.

Ted Simons:
>> Let's kind of bring it back a little bit to where folks who may not be familiar with the payday loan industry might get a better idea. Let's say I need $100 and I go to the payday loan store, how does it work? What happens if I am not able to repay the loan within the required time? First of all, how long do I got?

Stan Barnes:
>> Current law typical is two weeks. $100 in order to walk out of the store with $100 under current law you'll probably write a check for $117.65 and walk out with five $20 bills and go out and do your business. When your payday comes up, that check is deposited or you can buy it from the store and you're square on the loan. Under today's law if you can't make your payment on that payday, you can roll it over and pay another fee. In other words extend the loan until your next payday and pay another fee to do that. You can do that three more times. People can end up paying a number of fees on the same money held out too long. That's current law. The initiative makes that illegal. Stops it. And makes you leave the store before you can come back and get a loan the next business day. There's only so much you can do in the way of big government telling people how to spend their own money.

Ted Simons:
>> What happens if I can't pay that in two weeks?

Stan Barnes:
>> Under current law, there's--it's not addressed. So you either default or never get a loan again and your credit's hurt or who knows what. Maybe you'll go out and go something else. Under the initiative there's a mandated repayment plan that allows the customer to take whatever they owe, break it into four pieces, four equal pieces and spread it out over the next four paychecks. That might be one month at a time for no cost to that customer. So that reform itself is a very valuable reform for people that cannot meet their obligation.

Ted Simons:
>> Jean Ann some reform better than no reform, isn't it.

Jean Ann Fox:
>> These reforms don't actually work and been tried in other states. They found the 1-3% of eligible loans we want to the repayment plan. As prop 200 is written there's no requirement to alert customers that a repayment plan is valuable. You to negotiate it once a year. You have to know to come in and ask for it ahead of time and get it rewritten the day before your loan is due. It's not surprising in states that have tried requiring a repayment plan, very few loans are paid that way, very few consumers are unable to use it. Most key on paying to renew and paying off one loan and taking out a new loan before they get paid again. This does not stop that debit cycle.

Ted Simons:
>> Stan, why is this reform on the initiative when the industry could simply do it themselves.

Stan Barnes:
>> Well, there's things the industry cannot do is survive the elimination date in the state law. For the few years the industry has been at the state legislatures to ask them to make proconsumer reforms while preserving the choice for those who want the option. The legislature has refused. So to get ahead of the eliminating date the sunset date in the law June 2010. This is the only election where voters can make that decision. That's why an initiative proposition instead of being done a the legislature because the legislature refuses to make the reforms while keeping the industry alive in Arizona as an option for people.

Ted Simons:
>> wouldn't it not be easier to get them through if tomorrow were enacted on.

Stan Barnes:
>> We had a bill moved out of the state house that had some of the reforms not all of them. It was a weaker bill than this proposition. It failed in the senate. We have been there and done that. None of it happened. The industry is not going to turn itself inside out only to be eliminated because opponents of proposition 200 including some of the leadership of the no side want to eliminate the industry and remove the choice from people.

Jean Ann Fox:
>> well when the sunset provision takes effect in 2010, payday lenders will have to go under the Arizona small loan law and caps rates at 36% annual interest for installment loans. There will be creditability. This is not the only way credit is made available to consumers in Arizona.

Ted Simons:
>> Why would in these troubled economic times, why would there be a notion of getting rid of a credit option?

Jean Ann Fox:
>> This kind of credit causes debit problems for consumers. These loans require you to pay triple digit interest and a balloon payment loan due and full under the next payday or the check bounces. Under the terms of ballot initiative, the payday lenders will be able to charge you two $25 bounced check fee as well as the cost of the loan if you want to keep presenting the check. The other provision the ballot initiative allows them to do is electronically access your bank account to collect the proceeds of your loan and finances charge out of your bank account. This proposition expands the payday loan in Arizona opening up the state to internet payday lending rather than reforming and restricting it.

Stan Barnes:
>> I disagree. It does have an electronic component. That's only bringing the industry out of 1980s and into 2000s. When i bank, i never go into a branch. It's done all electronically. That's all the revision will do in the reform package. Customers want that convenience and more secure than a piece of paper being floating around. It's not a bad thing as by opponents.

Jean Ann Fox:
>> Actually it's putting consumers at more risk. I've been studying payday lending over 10 years. As the lenders gotten the ability in some states to electronically access your bank account, that puts consumers at-risk because the federal law that prohibits lenders requiring electronic payments only apply to installment loans. It doesn't apply to the single payment loans of the protections for you to control your bank account when you signed over electronic access to a payday lender are very doubtful.

Ted Simons:
>> why should in general and theory, why should the payday loan industry be allowed to charge so much more than other banking institutions and other ways that folks can get money?

Stan Barnes:
>> The premise is wrong in your question. The banking institutions and other financial options can charge far more than a payday loan. What is the apr on bouncing a check at your wells fargo where I bank? It is astronomical. It's a four digit number. Not a three digit number. If you are going to compare apples to apples a short-term, unsecured small-dollar loan is the kind of risk reward ratio for the business is like the bank dealing with your handling your bank overdrafts. Over here it's $15 per 100 under proposition 200. At the banks and other options, it's more expensive. It's unfair comparison to say this ought to be home loan like a 30-year loan or automobile loan. This as two-week average loan. That's all. It's simple and convenient on top of that.

Ted Simons:
>> Unfair comparison?

Jean Ann Fox:
>> It's not a two-week simple one-time loan. Only 1% of payday loans are made to people who go in take one out, pay it off in two weeks and walk away and never go back. These turn into a long-term loans of the average borrower has eight to 10 loans per year. Comparing this to one-time transaction is not the way it actually works. And it is fair to compare the cost of a payday loan to other sources of small loans. In Arizona that's a 36% rate cap and we have over 130 small loan companies that are opened. A cash advance on your credit card costs less than this. It's not fair to compare the cost of a payday loan to a penalty fee for doing something you're not supposed to do.

Ted Simons:
>> 30 seconds.

Stan Barnes:
>> My teenage son got a lesson on bank fees. His debit card kept working and he racked up $290 in fees on $25 bank account. He said, dad, what is this? I said welcome to finance. Personal finance, son. There are people living paycheck to paycheck and hard working Arizonans who need reform in the payday loan industry and a yes vote on 200 will give them that.

Ted Simons:
>> Stop it right there. Thank you for joining us. Thank you for joining us. That is it for now. I'm Ted Simons. You have a great evening.