Payday loan operators push for 'flex loans'

• State House committee to consider bill allowing "flex loans" designed for people with poor credit.
• Supporters say the measure would help consumers obtain loans that banks won't deal with.
• Proponents say flex loans are "debt traps" that have people pay back triple the amount borrowed.

Financial institutions would be able to offer small loans called "flex loans" to Arizona consumers with damaged credit under provisions of a measure offered by state Rep. J.D. Mesnard, R-Chandler.

Flex loans are intended for people seeking $500 to $3,000 for unexpected car repairs, medical bills or other expenses, according to the Arizona Financial Choice Association, a group that supports the measure and whose members include payday-loan businesses.

Traditional banks simply don't offer traditional loans for those consumers, said Jason Rose, a spokesman for the association.

Opponents such as Rep. Debbie McCune Davis, D-Phoenix, contend that flex loans are predatory and harmful for consumers already living at the edge. High interest rates coupled with high fees can trap borrowers in unaffordable debt, she said.

The bill, she said, builds a better debt trap than payday loans.

The measure, House Bill 2611, is scheduled to be heard by the House Commerce Committee today at 9:30 a.m.

Flex loans operate like credit cards with long-term installment payments and open-ended lines of credit up to $3,000.

The proposed legislation caps the annual percentage rate at 36 percent and clarifies that interest can only be charged on the principal amount of the loan and cannot be compounded. The measure also requires consumers pay at least 5 percent of the principal monthly.

The measure also allows for delinquency fees and other "customary" fees.

Interest and fees can escalate quickly, according to information compiled by Jean Ann Fox, a financial-services fellow for the Consumer Federation of America.

A $3,000 line of credit repaid according to the standards of the bill would result in payments totaling $6,343 after the first year, with the borrower still owing more than half of the loan amount, according to Fox.

After three years, the borrower would have paid $11,623, but still owing 16 percent of the loan principal, Fox said.

"The people in the community that I hear from say that it's the convenience of these loans that pulls people in, because there's no barriers getting them," McCune Davis said. "But once in, they can't get out."

Consumers would be better off getting loans from family members, friends or charitable organizations, she said.

Flex loans are intended in part for consumers whose credit suffered during the recession or who otherwise cannot obtain traditional bank loans, said Kelsey Lundy, a lobbyist for R&R Partners, which represents Arizona Financial Choice.

"In Arizona, really their only choices are either title loans, currently, or pawn shops, but obviously if you're going to get a title loan, you need a car, and if you go to a pawn shop, you have to have something to pawn. There are no options for this segment of the population that is unsecured," she said.

Flex loans provide options for consumers, Rose said. Consumers can minimize fees and interest payments by making timely payments. They also can use a record of good payments on flex loans to rebuild their credit scores.

"The question now is whether there is a gap in the system that the marketplace can respond to. This interest rate complies with state law of 36 percent. Now we get into fees. We can debate what's too much, what's not enough. The marketplace is going to decide," he said.