Does a 204 percent interest rate help in a pinch?

Ever since Arizona voters outlawed high-interest payday loans in 2008, the lending industry has been looking for ways around that ban.

This year, the debate is playing out in the form of "flex loans," short-term loans that would have a maximum 24-month term and a $2,500 cap. In addition, borrowers would be limited to one loan at a time, with their practices tracked by a database to ensure they don't pile up debt.

But it's the interest rate that's animated the debate: Although an unsecured loan is advertised with a 17 percent monthly rate, it works out to 204 percent on an annualized basis.

Proponents say people with poor credit need a quick cash option to deal with emergencies. Critics say it's a callous attempt to prey on the vulnerable.

On Tuesday, the House of Representatives hotly debated the issue for three hours before giving preliminary approval to Senate Bill 1316. It could get a final vote this week. If it passes the House, it would then have to go to the Senate and then to Gov. Doug Ducey.

Critics pounced on it as a payday loan in another guise and said it will only entrap people who already are on shaky financial ground in more debt.

Rep. J.D. Mesnard, R-Chandler, said the legislation does not revive payday loans, which carried annual interest rates of up to 400 percent.

“It’s not saying you have to charge 15 or 17 percent — that’s the maximum," he said, referring to the monthly interest rate for flex loans. If a lender can make a short-term loan work with a lower rate, he or she will, Mesnard argued, because it will bring in more business.

People should be free to make their own financial decisions, instead of having state government protect them from what could be a bad decision, he said.

But Rep. Richard Andrade, D-Glendale, said his own experience shows that such loans offer tempting quick fixes that can result in financial quicksand. He took out a payday loan when his wife was battling cancer and regrets the move.

“Had I known my credit union would have given a better rate, I would have done that," he said. "But they don’t advertise. These (short-term lenders) do.”

Andrade said the answer is better jobs, not a bigger interest rate.

"We need jobs that are going to pay a great salary so people don’t have to rely and be preyed upon by these types of loans," he said.

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Heavy lobbying 

The debate revisits the arguments lawmakers have used for years. And it follows on the heels of an aggressive campaign to open up Arizona to flexible-credit loans. Backers of the quick-loan industry, many of whom offer payday loans in other states, hired Axiom, a lobbying and consulting firm with ties to Ducey, to shepherd the bill through the Legislature. Industry representatives have contributed to lawmakers' campaigns, rallied community members to speak for the bill and gathered petitions in support of flexible loans.

"Traditional banks do not serve this group," stated the petitions, delivered to all 90 lawmakers. "And while there are auto title loans and pawn shop-style loans available, not everyone has assets or a vehicle in their name to register as collateral."

Democrats seized on this as "astroturf," or an effort to make something look like a grassroots campaign. They dug through the petitions, called people who signed them and discovered many of those people said they did not know about the bill, but were simply signing something when they visited a lending store.

Earlier this week, Rep. Debbie McCune Davis, D-Phoenix, asked Attorney General Mark Brnovich to investigate the Arizona Financial Choice Association for misrepresenting the bill's intent in the petitions. The petitions did not mention the interest rate, and she cited the Democrats' research as evidence that the industry was deliberately misleading consumers and lawmakers.

Brnovich's office has not yet reviewed the complaint.

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An option for emergencies

The petitions highlight the limited options for people with poor credit, supporters say. Sen. John Kavanagh, R-Fountain Hills, the bill's original sponsor, said Arizonans need a place to turn for quick cash in an emergency, such as an unexpected car repair or a medical bill.

This is an audience that might not meet the criteria for auto-title loans, the other quick-cash option available in Arizona. Those loans require the owner to have title to a vehicle and to turn it over to the lender to secure the loan.

Flex loans don't require any collateral, which is why the annual interest rate is 204 percent. Secured loans, however, would carry a maximum 15 percent monthly interest rate, which works out to an annual rate of 180 percent.

Jarrett Maupin, an activist in the Black community, said options are limited for people with poor credit and pressing needs.

"This time they're talking down to the wrong population," Maupin said of opponents who portray themselves as looking out for the vulnerable. "We'd rather have some choice than no choice."

Car washes and bake sales don't go far enough, he said, and the options the bill's opponents tout — such as charities and local churches — can't fill the need, Maupin said.

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The debt trap 

Critics of the bill, such as the Center for Economic Integrity, say research shows people who are already in debt are the typical users of such short-term, high-interest loans.

"If you have a cash-flow problem to begin with and you take out one of these loans, you kick the can down the road," said Kelly Griffith, executive director of the center's Arizona branch. Borrowers wouldn't be able to make the monthly payment, compounding their costs. A $2,500 loan at a 17 percent monthly interest rate would balloon to more than $10,000 over the 24-month period, she said.

McCune Davis has fought such loans for years, including leading the drive that defeated a 2008 ballot measure that would have re-authorized the payday-lending industry.

“This is not an industry that lifts you up," she said as lawmakers debated this week. "These are the loan sharks. And what you’re doing is legalizing their practice."

Contributions to candidates 

The bill faced a rocky start after Kavanagh introduced it, dying in a Senate committee last month only to have Kavanagh revive it as a "strike-everything" amendment.

Sen. Kimberly Yee, R-Phoenix, cast the decisive vote that killed the bill last month, calling the 204 percent interest rate  "excessive, to say the least" and adding she wouldn't support a policy that she says would further trap people in debt.

Kavanagh defends using a strike-everything amendment, which can make the bill harder for anyone other than Capitol insiders to track. "The will of the people should not be denied because of the vote of one person," he told The Arizona Republic.

He also rebuffed suggestions his support was bought. He benefited from $1,000 from the Financial Freedom PAC last fall, state records show.

"Nobody memorizes their list of donors," Kavanagh said. The donations are all legal, and besides, candidates who rely on private financing need donations to be able to run for office, he said.

Records show numerous other lawmakers have received donations from the short-term lending industry, including $19,250 to Speaker David Gowan's congressional committee from lobbyists who represent the firms.

In late 2015, the Financial Freedom PAC gave $15,000 to 19 state lawmakers, most of them Republicans. Sen. Catherine Miranda of Phoenix was the only Democrat. In addition, Ducey received $3,500 and Brnovich got $1,000, records show.

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Reach the reporter at maryjo.pitzl@arizonarepublic.com and follow her on Twitter @maryjpitzl.