Payday Loans

April 14, 2008

Transcript:

Ted Simons:
Good evening, and welcome to "Horizon." I'm Ted Simons. Governor Janet Napolitano will let E.L.L. funding increase become law without her signature. The legislature approved more than 40.5 million dollars to pay for implementing the English language learning programs. The deadline for approval for funding had been set by a federal judge for tomorrow before daily fines would begin.

Ted Simons:
The payday loan industry in Arizona is currently under attack by some who call it predatory lending. Others say payday loans supply a demand for fast cash loans. Voters could see two potential initiatives on the ballot in November, one outlawing the loans and another reforming the industry. Here to talk about the initiatives is Senator Debbie McCune Davis, chair of Stop Payday Predators. And also with us is Stan Barnes with Copper State Consulting Group, speaking for the Arizonans with Financial Reform, the group sponsoring payday loan reform.

Ted Simons:
Thank you so much for joining us.

Stan Barnes:
Good to be here.

Ted Simons:
Debbie, let's start with payday loans. How do they work?

Debbie McCune Davis:
They operate on a two-week cycle at extremely high interest rates. They are offered to people with very few questions asked. Before long, people find out what the industry's interested in is not them paying back the loans, but renewing the loans over and over again. They're operating today at an interest rate, an annual A.P.R. of 458%. And the problem is that our usury cap in Arizona is 36%. They have the carve-out in the consumer loan act that applies to them, and it's time to end that. We have a chance to do that in 2010 when the sunset takes effect and the industry loses its ability to operate. They would then have to come back under the 36% cap.

Ted Simons:
Stan, I want to talk more about what Debbie is saying, as far as the sunset and what she want to see done. As far as how they work, someone just writes a check for a certain amount plus the interest? I'm confused as to how they actually work.

Stan Barnes:
One of their chief benefits is they are so simple. The idea is that the borrower who is -- finds himself in a circumstance, for an example, and needs $100 for whatever reason, writes a check in a typical store for $117.65 and receives $100 cash today. The check is held by the payday loan store until the next paycheck period. And so the customer then can buy his check back and pay it off, or the store can deposit it and it clears on payday and away the customer goes. The reason they thrive, over 700 stores and over 2500 people that work the industry in Arizona, is because they're simple, convenient, and the cheapest alternative to most people in most circumstances in that position. Let me give you an example. If you need $100 to buy baby formula and you're going to buy it, but you don't have any money, your options are pretty limited. If you go to Wal-Mart and bounce a check on your Wells Fargo account, it costs you $54 to do that. The payday loan stores costs you $17.65 to do that. Most people are trying to avoid other more costly alternatives and they like the simplicity and convenience.

Ted Simons:
Don't they thrive as well because 90% of industry revenues, according to sources here, come from folks who can't pay off the loan?

Stan Barnes:
I don't know what those sources are. But the reforms that we're promoting that will go to the ballot in November, if we are lucky, if we qualify, will reform the system so much that it'll be very much of a pro-consumer product versus the product it is today. Debbie and other opponents of the industry already have a sunset in law, but now we're trying to qualify an initiative that would make it a felony to have a payday loan. Removing choice from consumers like that, I don't understand.

Debbie McCune Davis:
Let me address that, because I think it's important that we think about whether or not we want this industry to reform itself. Bottom line is, they can change anything in their business practice today. They don't need their initiative to do that. The only thing that their initiative does is take the sunset provision out of the law. The bottom line is the industry can make any of those changes today and can make them voluntarily. They take advantage of people because, when they can't pay the loan back, that loan gets rewritten and rewritten to the point where the average customer of a payday lending store takes out eight to nine loans a year. It isn't a matter of that one-time transaction that $100 with a $15 fee. If it were a bounced check, you would be unhappy with your bank. It would feel a little like they were in your checking account taking your fee out, and that's a little offensive. But with these guys, it's like an abusive relationship. Every two weeks you go in, you can't pay it off. They take their fee off the front and write the loan again. Before you know it, you're in the $400 interest range.

Stan Barnes:
What Debbie just said is factually not true. All you have to do is to read the initiative to know that it does a great deal more than remove the sunset. The only sunset I might add on a private sector business in the state of Arizona. It cuts the rate, it ends the rollover situation that Debbie is referring to, in terms of extending the loan. It ends that practice. It sets up a free repayment plan for those customers who cannot meet their obligation. Is preserves choice for customers that want to choose it. What opponents of payday loans can't tolerate is that rational Arizonans are making a decision, that's financially based, in their own interest to borrow from a payday store cheaper than the many alternatives that Debbie is talking about.

Ted Simons:
Can these stores be used responsibly, and don't most folks use the stores responsibly?

Debbie McCune Davis:
We don't think so. The statistics indicate otherwise. The industry tells you these folks are happy doing business with them. What we know, they count those rolled-over loans as satisfied customers, as paid-back loans, when in reality that's not the case. In fact, the reforms that Stan talks about, lowers the cap on interest rates from 458% to 391, and they call this a substantial increase. I go back to the usury rate of 36%, and point to the 90 licensed folks operating in the state today under that cap. I tell you that our folks are much better off doing business with legitimate lenders and not with payday lenders.

Ted Simons:
Is there a place for short-term high-interest loans in the marketplace?

Debbie McCune Davis:
I don't think there is, and I'll tell you why. We've looked at what happened in North Carolina, and what's happened in other states. 12 other states have outlawed this industry in the last few years. Washington, D.C., as well, the District of Columbia. The bottom line is in those communities they've looked at what happens, and the lenders that are there doing business under the interest rate cap are the ones that begin to provide the services to these folks. We believe this is really much better for the community.

Stan Barnes:
Ted, a working paper done by the Federal Reserve Bank of New York, a researcher for the Federal Reserve Bank of New York, found that when payday has existed in a state and is removed from the marketplace as a credit option for those who choose it, that families are hurt. Bounced check fees go up, bankruptcies go up. It's not the industry study, it's the Federal Reserve Bank of New York's research study. I believe what Debbie's saying is inaccurate. There is a place for short-term high-interest loans. They're not interest at all, they're fee loans. There is a place in the marketplace. What voters are going to see in November is that very choice, eliminate the entire industry or reform the industry. That's what's coming in November. I think most people will choose the reasonable effort.

Ted Simons:
Why the reform now? Payday loan industry has been under the microscope and the topic of conversation for quite a while. Why now?

Stan Barnes:
Not only is it under attack from opponents who want to end it immediately and make it a felony, because in state law is a sunset provision. That sunset is coming in June of 2010. The legislature so far refuses to make these reforms to let the industry preserve the choice going forward. So the industry feels like the reforms need to be done now in context with keeping this option open to consumers.

Debbie McCune Davis:
It's all about self-interest on the part of the industry. They can't get the sunset provision extended at the legislature, so they're going to go to the voters and try to convince the voters that this industry should write its own regulations and be able to operate in perpetuity in Arizona. The real challenge here for us is to help the public understand that if they do that, we're under the voter protection act. The legislature won't even be able to go in and correct anything that's in this initiative. There's a lot at stake here, and I don't think we like the idea of the fox guarding the henhouse. This is a classic case of that. Let me go one step further and tell you that the study, the Federal Reserve study that Stan cites, looked at more states than just North Carolina, which is the state that did do the analytical work on what happened in their community when payday lenders went away. We know there are legitimate lenders in the community that will step up and provide these kinds of loans to the community.

Stan Barnes:
It won't be the fox guarding the henhouse when the voters of Arizona choose reform or elimination. I smile when Debbie talks about the rollovers and how that's the big problem. We tried that reform at the legislature and opponents including Senator McCune Davis opposed them. The very arguments against the industry used are answered in the initiative with the choice preserved for consumers. Yet those same opponents still oppose. I don't know why. Are the reforms a problem or is it just the fact that it's an initiative that, once it's there, it's there?

Debbie McCune Davis:
The true reform is to take away their authority to do business, and bring it back under the Arizona Consumer Loan Act. The protections for consumers are there, the 36% cap is there. And that's where we need to end this discussion, is we don't need payday lenders in Arizona. Other states have demonstrated it, the marketplaces are fine without the predatory lenders. I think that's where the Arizona voters will end up.

Stan Barnes:
When your utilities are about to be shut off and it's going to cost you $100, it might cost you $40 to turn it back on, where's the dignity in that? And the cost of that versus going to a local payday store where it's simple and convenient, it makes sense. That's why there are so many of them because they make sense.

Ted Simons:
And we'll stop it right there. Thank you so much both for joining us on "Horizon."

Stan Barnes:
Thanks, Ted.