Arizona’s 2010 elimination of “payday” loans has driven borrowers to costlier, riskier alternatives – including unregulated, offshore lenders with which consumers have no protection or recourse in case of fraud or abuse. For example: a 2016 Cornell University analysis found that “payday loan” prohibitions result in higher use of pawnshops and other forms of alternative lending, and increase incidences of bounced checks and bank overdrafts, resulting in fees significantly higher than those associated with short-term, small-dollar loans.
Further, independent research demonstrates there remains significant market demand for a short-term, small-dollar lending product. Almost 6 in 10 Americans lack the ability to pay $500 in unanticipated expenses, and more than 1 in 4 Arizonans report they are unbanked or underbanked.
It’s time to bring this market out of the shadows by enacting reasonable, fair oversight that protects consumers while providing access to a needed financial product.
The Proposed Flexible Loan Legislation:
- Establishes an annual interest rate of 36%, plus a daily maintenance fee to be set by ADFI.
- Limits borrowers to no more than $2,500 in loans, with an 18-month repayment window.
- Prohibits pre-payment penalties and compounding finance charges.
- Requires loans to be “closed-end” to prevent loan-stacking, and mandates that lenders use a database to ensure borrowers are not exceeding the $2,500 cap via multiple loans.
- Mandates lenders put some percentage of the loan amount into an account to be remitted to the borrower upon timely repayment of the loan.
- Requires lenders to conduct an “ability to pay” analysis on each transaction prior to making the loan.
- Complies with the federal Truth in Lending Act, which requires disclosure of the terms of the loan, the total amount of the loan, the annual interest rate and the number, amount and due dates of all payments.
- Further requires all payment statements to include disclosure of the remaining principal balance and remaining scheduled interest.
- Provides a safety net for borrowers who fall at least 3 months behind on payments and request help.
- Freezes accrual of interest charges and late fees, and allows borrower to refinance to a lower rate with a repayment plan upon completion of a financial literacy course and credit counseling.
- Permits lender to refer a delinquent borrower to an approved credit counseling agency and to include repayments under this section in a negotiated debt-management plan.
- Adopts the federal Department of Defense rule prohibiting these loans from being made to active military members and their dependents.
- Creates a Community Development Services Fund overseen by ADFI and funded by an industry license assessment.
- Monies in the fund will provide low-interest loans to impoverished people and create financial-literacy and credit-counseling programs.