Flex Loans Bill

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A bill has been proposed that would allow financial institutions to offer “flex loans” to consumers, loans ranging from $500 to $3,000. Proponents say it will offer people with bad credit a chance to get small loans to help deal with unexpected bills. Opponents say the high-interest loans would be the return of “payday” loans that can trap consumers in debt, forcing them to be permanently on the looking for how to get 1000 dollars fast to pay their next bill. Representative J.D. Mesnard, the sponsor of the bill, will talk about the measure, along with Representative Debbie McCune Davis, who opposes the legislation.

Ted Simons: Coming up next, on "Arizona Horizon," hear from both sides of a bill that would legalize flex loans and we'll learn about "Downton Abbey"-like castles from a member of British nobility. Those stories next on "Arizona Horizon."

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Ted Simons: Good evening and welcome to "Arizona Horizon." I'm Ted Simons. State lawmakers are considering legislation that would allow financial institutions to offer flex loans which involve lines of credit ranging from $500 to $3,000. Proponents say it will help those with bad credit deal with unexpected bills. Opponents say it's a return of pay day loans which can trap consumers in debt. Here to discuss the measure, sponsor J.D. Mesnard and representative Debbie McCune Davis who opposes the legislation. Good to have you both here. All right, let's define terms here. What is a flex loan?

J.D. Mesnard: A flex loan is like a line of credit, something that people are familiar with. It's a high-interest credit card for those who are struggling to get credit if the more traditional means.

Ted Simons: And this is good for Arizona to legalize a flex loan because...

J.D. Mesnard: Exactly what I said. There are some folks who find themselves in a situation where they need access to some sum of money, a couple of thousand dollars, $1,500, and they go to a bank or whatever and they can't get it and they're in a situation where they need it. Where else do they go? They can try to go to family and friends if their family and friends have the means or if they're comfortable with that kind of relationship dynamic but otherwise, very few options for them.

Ted Simons: Why is that a bad idea for Arizona?

Debbie McCune Davis: The voters have already spoken on the subject. In 2008, the pay day lenders tried to extend their franchise to continue beyond their sunset date and the voters said no and they said it pretty loudly with just short of a 60% disapproval. It's the very same companies coming back. It's been seven years and they want to be in this market and what they're saying or what their spokes people are saying is that other states around us have these kinds of lending tools and that Arizona should, too. But what's interesting to me about that is that the voters have spoken. They may not have in those other states. Here, I think we're pretty clear on this.

Ted Simons: If the voters spoke regarding pay day loans and this is in the same arena, the same ballpark as pay day loans, why are we looking at this again?

J.D. Mesnard: That probably is the single most brought up point, that the voters have spoken, they don't like this. The problem is while you can assume voters like something when they vote yes, it's not safe to assume that if it fails, it's because they hate it. For instance, that would not explain why I voted against pay day loans back in 2008. There are a variety of reasons people would oppose something, even in the legislature if we're not certain about something, haven't been able to look at the legislation and it was substantial on the ballot, we're going to err on the side of vote. In addition, you have the fact that the great recession has hit since then, it's a lot harder to get credit today than it was back then. There are a lot of reasons why saying that the voters have spoken really falls short.

Ted Simons: Should this not be after these seven years be reconsidered?

Debbie McCune Davis: I have had no one come to me and ask for this particularly kind of loan to come back into the market. It's the very same companies, and the argument that there's nowhere else to go is not true. We just authorized last year an expansion of the consumer loans and gave them additional fees. And they've just now in the last 11 months taken out up to 200 licenses, so we heard this last year, that there was no place to go but there are places to go, in addition to friends and family and charities and adjusting your resources. There are places for people to go. It's a flex loans or nothing conversation.

Ted Simons: We're talking people with bad credit, correct?

Debbie McCune Davis: That's correct. And, in fact, those consumer loans are much more in an individual's interest because they sit down with people and they actually figure out their ability to repay the loan, which is the critical element of not having a loan, a triple digit loan be predatory.

Ted Simons: Respond, please.

J.D. Mesnard: There are options out there that usually involve collateral. Consumer loans are usually for higher dollar amounts, they can go up to $10,000 and they should try to get those if they can. But if they can't get those and they're relegated to pawning something, what if you don't have something that you can put up as collateral? You're left with nothing. I think they should go to family and friends, but to say that if you don't have something that's collateral, you're S-O-L, I'm not sure that makes sense.

Debbie McCune Davis: There's another component that's not talked about much and that's the fact that this bill authorizes online lending and that's another trap. And it's a concern because when you are engaged in these loans, and you make your payments, most of the time they require that those payments come out of your bank account so it's an electronic transfer. And by function, that means that payment comes first. You don't have control of your cash flow at that point because that payment comes out first. And the way this bill was introduced, it had on its face a 36% interest rate but the fees that were attached that were not to be calculated as apr took it to 116%.

Ted Simons: Let's talk about that, this idea of a $3,000 line of credit. The first year half of the loan is still owed, and it's up to $6,300. Some see that as predatory, some see that as usury, what do you see?

J.D. Mesnard: I see it as what the market will bare. You have a consumer and a lender. They're going to come together and work out something that makes sense for the two of them. You can't force somebody to loan at a low interest rate. I hope charities step up, I hope others step up, you've got to let a lender say here's what I'm willing to risk as far as my money is concerned. We're going to be lowering some of the interest rates, working on an amendment in the house. But at the end of the day, you can't force someone to loan money, and especially to someone who's considered high risk, they have bad credit.

Ted Simons: How do you do that balancing act? We're talking about folks who do have bad credit, these are considered risks within the financial community. How do you get that community to say okay, $500 to $3,000, here you go, without making it profitable, at least for them?

Debbie McCune Davis: Well, let's take the conversation beyond making the loans and getting the loan. Let's talk about paying off the loans and that's where the problem lies. You can let people into the loan and you can take the libertarian view that whatever two parties agree to is fair game in Arizona but that's not what our law says. We have a usury rate of 36% and when you go above that, you're in a very dangerous territory in terms of populations who may have economics that put them in a stressful situation where they're making decisions without really understanding the cost attached to that loan.

Ted Simons: Same question kind of turned on its side for you. If we're talking about folks that have bad credit and they are high risk, if after three years they will have paid $11,000 on a $3,000 loan, is that right?

J.D. Mesnard: Yeah, so I'm not sure if there's a misunderstanding of the bill but that won't happen. There will be a minimum payment they pay towards every time or a minimum dollar amount, so you don't have a three-year time frame. You're talking maybe 21 months, a little under two years if they only made the minimum payments. But at the end of the day it is about consumer choices. No one forces them to do this. Is it true that if given choices people can make bad ones? Yes, it's true. Sometimes, that will occur but you can't eliminate the choices for everybody and assume nobody is going to need this because you're trying to protect them.

Ted Simons: How do you respond to that?

Debbie McCune Davis: Well, let's talk about it. When we talk about financial choice, that's the argument that comes from the industry. And that's who's on the pro side of this argument. When you take the other point of view and ask why this is necessary, we have a long list of community agencies who stepped up and said no, they've seen the damage that these kinds of loans do in the community and they don't want them back and I could read that list but I can tell you that organizations like -- children's action alliance, the Arizona community action agency, they're the ones who deal with this population. They're the ones who find them the assistance they need and they are not the ones asking for this.

Ted Simons: And in terms of a bottom line I think the pro side would say, access to something is better than access to nothing. Is that valid in this argument?

Debbie McCune Davis: Well, not if you look at the pew study that was done where they went directly to people who used these types of loans in other states. And when asked the question if these are not available, what would you do? They had a whole list of answers. And most of them were around I would not spend money on other things, I would make certain that I had things in order, they didn't say they need this and they didn't say they needed them to the tune of 80%.

Ted Simons: Other side. The critics will say this is basically a deal where you're making money off of those who can least afford it. Is that a valid statement?

J.D. Mesnard: I think we're going to get into trouble if we start questioning people's motives. If there's demand, that's the way the free market works. We can get mad at it, we can criticize it, we can curse life that situations come up that require us to need access to credit quickly. But that's life. And I really don't know how to say it any other way. People should have the options.

Ted Simons: But as a society, should we not watch out for those who may not make the best decisions?

J.D. Mesnard: Absolutely we should watch out for people, there are limits that are placed in the bill. Obviously, folks are going to say they're too high. To some degree it allows the product to occur because without higher interest and a risk situation, you're not going to have people even lending. You're back to square one, where do they go? Again, I hope that people will step up to the plate, those who are critical of this to lend to folks in these situations and then you're not going to have folks needing a higher interest rate product.

Ted Simons: The idea that it is helpful again for those who need it. We've got about 30 seconds left here. They've got to get somewhere, somehow.

Debbie McCune Davis: Well, I'll just quote pastor reverend Stewart, who basically says this is usury. If you go above 36%, you are engaging in usury and you are taking advantage of people, it's harmful to his community and that's the same message I hear from the religious community, from the military community, and the community at large.

Ted Simons: Okay. We have to stop it right there. Good conversation.

J.D. Mesnard: Good to be here, thank you for having us.

J.D. Mesnard:State Representative, Arizona; Debbie McCune Davis:State Representative, Arizona;

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