Flex loans help working-class families

David Schwarz, AZ I See It | March 16, 2015

Pro argument: Access to small-dollar loans shouldn’t be a luxury limited to the upper class.

The Arizona Legislature deserves to be commended for taking seriously the new proposal for financial freedom before them this session (House Bill 2611). They’ve held numerous meetings and continue to study this issue exhaustively.Sadly, the very notion of “freedom” has come under assault in the financial sector since the crash of 2008.

In response, Congress and the administration passed the Dodd-Frank legislation creating the Consumer Financial Protection Bureau, another massive federal bureaucracy largely to override state authorities. Some might consider the name an oxymoron. The legislation reeked havoc on a financial system in this country, which was already in an unstable, reconstruction mode following the economic crisis.

Washington did what it knows how to do best: It regulated. The Dodd-Frank legislation ran over 3,000 pages. The CFPB’s rules to oversee and intervene in financial products run over 15,000 pages. The Wall Street Journal has noted that these federal regulations already could fill 28 copies of Tolstoy’s novel, “War and Peace.”

Since the recession began, the number of Americans lacking sufficient access to credit for emergency expenses has more than doubled to a staggering 68 million, including a disproportionate number in Arizona.

The flex loan bill before the Legislature is a common sense proposal to allow a new installment-lending product in Arizona similar to its surrounding states. Thirty-five states have more small-dollar lending options than Arizona. Our own research shows that one-third of these loans are used for health care expenses, one-third for larger ticket household and automotive repairs, and one-third for small business owners.

Flex loans will authorize up to a $3,000 line of credit, similar to a credit card, which will be payable in monthly installments. Unlike credit cards, however, the flex loan statements will be easy to read, the interest will not be compounded, and there is a mandatory minimum payment of 5 percent of the principal balance due each month.

Further, there is no early pay-off penalty; most companies encourage “rapid pay” programs permitting customers to make an extra payment per month and thus pay-off the entire balance much quicker.

Our research on these products across the U.S. shows that the average loan amount is $1,000, and the average pay-off time is eight months. Forty percent of all open lines of credit our companies offer in the U.S. sit at a zero dollar balance.

The Arizona House passed the flex loan bill March 4. The issue is now being debated in the Senate.

Our companies, customers and all of our diverse supporters have been vocal on the need for this product in Arizona. The support has been broad-based and substantial, ranging from the Goldwater Institute to families statewide. We have tried our best to be open and transparent about this proposed legislation. I hope we have succeeded.

Consumer choice and access to varied credit options are not a luxury item to be enjoyed by the upper class alone. Rather, these options are a must for working class and middle class families.

David Schwarz is president of the Arizona Financial Choice Association.


More lending options needed for Arizona families

Scot Mussi, Guest Opinion, Arizona Capitol Times | March 5, 2015

For many families in Arizona, the “Great Recession” is far from over.  Continued bureaucratic meddling and poor policy decisions by our elected leaders have made it difficult for many hardworking taxpayers to make ends meet. For some families the situation is so dire that one unforeseen financial hardship (car trouble, leaky roof, etc.) could prove catastrophic, especially if the family lacks access to credit or other borrowing options to pay the bill.

That is why it is important for Arizona to expand the legal lending options for those struggling with access to credit. Unfortunately, 35 other states, including Texas, Utah, California, Nevada and Colorado, have far more consumer lending options than are available in Arizona.

That’s right, even regulatory-friendly California has more choice and lending options than Arizona. House Bill 2611 addresses this problem head-on by permitting consumer “flex loans.” A flex loan is like a line of credit with a $3,000 maximum cap, and the borrower has to demonstrate the ability to repay the loan.  In other states that have this product the average loan is approximately $1,000 and is paid off within a few months’ time frame.

These loans fill an important void in the Arizona market. They provide needed funds to working families that banks aren’t serving. Banks traditionally do not make smaller dollar loans, and banks generally don’t lend to families with lower credit scores.

Why would a business friendly state such as Arizona restrict lending options that would bring competition to this marketplace and is essential for struggling consumers?  The major reason is the misconception that by restricting these types of credit options we can protect our residents from making bad lending decisions.

Unfortunately, both empirical evidence and common sense have proven that the opposite in fact occurs. Several studies have been conducted on short-term lending and the results have been the same: demand is not reduced when states reduce or limit access to credit or short term loans. Instead, movements to ban short- term lending options such as “flex loans” have only driven borrowers to offshore or certain untraceable, unlicensed online options, or illegal lenders. These types of underground options are dangerous and offer no protections to our most vulnerable residents.

The only other legal option a borrower with a lower credit score is to put his or her car or TV down as collateral in a “pawn” transaction while others turn over their auto title and a set of their car keys for a “title” loan.  This is great for borrowers with some collateral, but it is not an option for many borrowers.

Flex loans provide a lifeline that gives many borrowers the opportunity to make ends meet or even improve their credit scores. It also gives the state’s economy a needed boost by making such loans available to a much greater number of Arizonans. And it creates more jobs in the state’s lending industry. Right now members of the Arizona Financial Choice Association employ more than 1,200 people in 90 locations. HB2611 would greatly increase that number.

For Arizona’s economy to operate at full speed, our lawmakers need to release the parking brake and allow lenders and borrowers to conduct business in an open, free market setting with competition and transparency.  HB2611 accomplishes this goal while providing a much needed lending option to Arizona residents who need it most.

–Scot Mussi is president of the Arizona Free Enterprise Club.


Why Everything Elizabeth Warren Told You About Consumer Credit Is Wrong

Guest post written by Todd J. Zywicki and Thomas A. Durkin
Todd Zywicki is a professor at George Mason University School of Law. Thomas Durkin is a retired Sr. Economist at the Federal Reserve Board

Why do people borrow? To hear law professor turned Senator Elizabeth Warren, it is because they are seduced by rapacious lenders and a consumerist culture into living beyond their means, buying big-screen televisions, new cars, and expensive vacations. And before you know it, you are under the thumb of the big banks—or, even worse, of the street corner payday lender.

But as we show in our new book, Consumer Credit and the American Economy, economists have long understood why consumers borrow. Although there are exceptions to any rule, for most it bears little resemblance to Senator Warren’s picture of hapless victims goaded into debt by rapacious credit card issuers. Instead, consumers borrow for essentially the same reasons that businesses borrow: for capital investments and to smooth disruptions in income and expenses. And paternalistic regulations that make credit more expensive and less available typically makes people poorer.

Consider something as mundane as a washing machine. A washing machine is no frivolous bauble; its value is in not having to schlep to the laundromat every Saturday with a pocket full of quarters. While a washing machine costs much more on the front end to acquire, it generates a stream of benefits over years. In that sense, it is no different from a construction company that borrows money to purchase a backhoe to dig a ditch instead of hiring ten guys with shovels. Whether it is the financing of a car or a financing of a college education (increasing human capital), the bulk of consumer lending goes to acquisition of investment goods. In addition, like retailers that rely on bank loans to ride out quarterly fluctuations in sales and expenses, households use consumer credit to deal with unexpected expenses like a sick child, emergency car repair, or other financial disruption.

But aren’t people today different—more prone to living beyond their means? As then-Professor Warren herself put it in a 2004 interview with PBS, “The [credit card] industry has no evidence that people were being turned down for loans in the early 1980s. What they have is evidence that people more often in the early 1980s preferred to pay cash than to pay on credit.” Yet hand-wringing about how other people use consumer debt is as old as debt itself. For example, the New York Times warned in the 70s that American consumers were “borrowing trouble”—the 1870s, that is.

The Real Surge In Consumer Debt Occurred In The Post-War Period

To be sure, during the housing boom mortgage debt rose dramatically. But when it comes to non-mortgage debt, Federal Reserve data indicate that while consumer debt rose dramatically in the post-War period, since the 1960s the household debt-service ratio (the percentage of household income dedicated to debt service) has remained constant. Credit cards have simply replaced earlier types of consumer debt, mainly installment debt (buying “on time”). Think about it: 40 years ago if you needed $400 for a car repair, you would visit your bank, credit union, or a local personal finance company for a loan to be repaid over 12-24 months. If you bought a refrigerator or new bedroom set, you would finance it through the appliance store or department store and repay it “on time.” Today, you likely would just put it on your credit card. In fact, even despite the astonishing surge of student loan debt over the past two decades (it now exceeds credit card debt), the non-mortgage debt repayment obligation as a share of income is actually lower today for the typical household, including the typical low-income household, than in 1980 (see chart below).


The data show that the real surge in consumer debt occurred in the post-War period as consumers migrated from city apartments with hand-me-down furniture to the suburbs and adopted the accessories of the mid-20thCentury American lifestyle: a three bedroom house with all the modern appliances, new furniture, and a Chevy in the garage, all bought “on time.” The introduction of general purpose credit cards changed the composition of consumer credit, replacing installment loans and retail credit with credit cards, but it didn’t increase it. Moreover, bank-issued credit cards freed consumers from their tethers to the large department stores that could afford to maintain costly credit operations and enabled small retailers to compete on equal footing, not to mention making Internet shopping possible.

The Restrictive Regulation Myth

A final myth regarding consumer credit is that consumers benefit from restrictive regulation of consumer credit, especially low-income consumers. But while well-designed regulation can improve competition and consumer choice, economic history demonstrates that heavy-handed regulations that restrict product offerings frequently harm their intended beneficiaries. For example, who uses payday lending? Those who don’t have access to credit cards or would max out their cards if they used them. So what happens when well-intentioned regulators take away payday lending? Many payday lending customers shift to other alternatives, such as bank overdraft protection or pawnbrokers, which are often even more expensive. Eliminating options for low-income consumers (especially those options that they are actually using) doesn’t eliminate their need for credit.

And if you take away legal, high-cost options? Well, history shows the unintended consequences of that policy too: When New York’s legendary Genovese crime boss Anthony “Fat Tony” Salerno was indicted in 1973 on 11 counts of loan-sharking (and one count of criminal solicitation to have a victim’s leg broken) it was estimated that his operation had some $80 million a day outstanding—that’s $429 million in today’s dollars, in just his territory alone. Nor was Fat Tony alone: according to a 1968 U.S. Senate Report, loan-sharking was the second-largest revenue source of the mafia at the time.

A sound understanding of the history and economics of consumer credit can provides a warning about the dangers to consumer and the economy of poorly-conceived regulation. Yet there are too many, including Senator Warren, who romanticize the past and fail to understand the true benefits of consumer access to credit and the potential unintended consequences of paternalistic regulation. As Dodd-Frank, the Consumer Financial Protection Bureau, and other regulations pile their weight upon the economy, consumers have been systematically driven out of the mainstream financial system and into high-cost alternatives or lose credit altogether. We’ve seen this movie before—let’s hope that Washington can write a different ending this time.


Additional resources and links:

The Pitfalls of Regulating Consumer Credit – Mercatus Center

NHCSL Resolutions 2015 – National Hispanic Caucus of State Legislators

Why a 36% Cap is too Low for Small Dollar Loans – Expert Op-ed, Mercatus Center