A last-minute bill introduced at the Arizona Legislature would open borrowing opportunities for people with poor or no credit, at a fee that tops out at 164 percent.
The legislation is the latest attempt to open the lending market beyond the 36 percent interest-rate cap that voters put on payday loans nine years ago. It won party-line support from the Senate Appropriations Committee on Tuesday, with Republicans in favor and Democrats opposed.
Although supporters cast House Bill 2496 as a departure from “flex loans” and auto-title loans, it sparked the same debate that surrounds those other high-interest loan proposals. Supporters said it would fill a need for people with short-term cash needs who can’t qualify for conventional loans. Critics said it amounts to predatory lending that could trap people in debt.
“It’s like every year it’s a new scheme,” said Kathy Jorgensen, representing the Society of St. Vincent de Paul in opposition to the proposal.
This year’s bill would create a consumer line of credit, capped at $2,500, which must be paid off in a year. No collateral is required. Instead of an interest rate, the loans would carry a daily “transaction fee” of 0.45 percent, which works out to 164.25 percent a year.
Borrowers who fall behind in mandatory monthly payments could freeze the past-due amount and its daily fee and work out a repayment plan. However, they still would be liable for the balance of their loan and required to pay at least 8 percent of the balance each month.
A borrower would be limited to one loan per year, although critics say a person with a balance due at the end of 12 months could roll that into a new line of credit in the next year.
Not everyone would qualify for the loans, Mike Kerr, a representative of eNova International, told the senators. The company provides similar lines of credit in other states, and uses analytical tools to evaluate potential borrowers’ credit risk and ability to pay.
Kerr said the average loan in the other states where eNova operates is $950, although the effective interest rate varies depending on state laws and negotiations with individual lenders.
Opponents: Predatory lending, again
Opponents said the bill is another form of predatory lending dressed in a new package.
Ellen Katz of the William E. Morris Institute for Justice reminded lawmakers that voters outlawed payday loans in a 2008 ballot initiative. That sent a signal that people aren’t interested in introducing other high-cost loans in Arizona, she said.
And, she noted, the structure of these consumer lines of credit is unacceptable to the military, which does not permit them under the terms of the federal Military Lending Act.
Cynthia Zwick, executive director of the Arizona Community Action Association, said there are programs that provide housing and rental assistance, and services to help people cover utility bills or other necessities,.
She conceded there aren’t enough such programs for the demand, but the answer is not a 164 percent annual rate, she said.
Democrats on the panel opposed the bill.
“What we ought to be doing as a Legislature is ending poverty in Arizona,” said Sen. Steve Farley, D-Tucson. “We do not need to open up the most vulnerable in our state so people can make money off of them.”
An option for those in need of quick cash
Most of the favorable comments for the bill came from a few of the senators on the Appropriations Committee.
Sen. John Kavanagh, R-Fountain Hills, said a consumer line of credit could help bridge a person’s need if an unexpected bill or payment arose. And if paid off quickly — a $1,000 line of credit repaid within two weeks would cost $70 in fees, he said — the amount charged is not predatory.
He challenged opponents to specify where people could turn for a short-term infusion of cash if they don’t have a credit card or a bank loan.
Sen. Debbie Lesko, R-Peoria, said she sponsored the bill because it fulfills a need. Charities and community groups don’t have the capacity to help everyone in need of a small infusion of cash, she said.
“I’ve been broke before,” she said. “I know people who have been broke. (The bill) gives people that are in these bad situations, that have bad credit, another option.”
She introduced the bill as a strike-everything amendment, meaning it gutted a bill that originally dealt with homeowners associations and replaced it with the line-of-credit language. The bill next faces a full vote of the Senate, and then would return to the House for a full vote.
It’s unclear if it would get that far; last year, the Senate killed a flex-loan bill that would have allowed loans at a maximum 204 percent interest rate.
Opponents said they believe there is not enough support for the bill to get out of the Senate.