Payday lenders face campaign to cap interest rate
Our view: Predatory lending practice may face a real challenge from the voters
A new initiative campaign to outlaw payday lenders in Arizona is a welcome development in the fight against this predatory-lending practice. It's our hope that Arizona voters in 2008 will be able to show state lawmakers what it means to stand up for what is right.
State Rep. Marian McClure, R-Tucson, announced Tuesday that she is launching an initiative drive that would cap the annual interest rate for short-term loans at no more than 30 percent, plus the going prime rate, reported Howard Fischer of Capitol Media Services.
As of Tuesday the prime rate — the interest rate charged by banks to their most creditworthy customers — was 8.25 percent. If McClure's initiative were the law today, that would mean short-term loans would have a maximum interest rate of 38.25 percent annually.
Such a law would be a vast improvement over the current fees charged by payday lenders, which equal an annual interest rate of 400 percent, or higher.
The initiative is a necessary step because the Legislature has shown time after time that it is unwilling to protect poor Arizonans who unwittingly fall into a debt trap by taking out these loans.
During the current legislative session alone, eight bills that would have curtailed or ended payday-lending practices failed to make it out of committee. Only one got as far as a committee vote, where it failed.
Even bills sponsored by members of the Republican majority were left to wither on the vine.
The only payday-loan bill still alive is a strike-all measure, Senate Bill 1446, written by McClure, which has made it out of a House committee and is awaiting further action.
The problem with SB 1446, however, is that it contains several unenforceable provisions and a major concession to the payday-loan industry — a lifting of the sunset provision for the 2000 law that would put lenders out of business in 2010.
Even if SB 1446 were to become law, McClure's initiative campaign would in effect shut down payday lenders by limiting how much money they can make on their loans.
Lee Miller, a lobbyist for the Arizona Community Financial Services Association, which represents payday lenders, told Fischer that an interest-rate cap would kill the industry.
"The price we charge is the price we have to charge to operate that business model in those locations and still make a fair profit," Miller said.
What Miller doesn't say is whom the industry profits from — the poor, financially illiterate borrowers who don't have access to traditional credit. On these pages, we've offered examples in the past about people whose financial situation was worsened, not improved, by taking out a payday loan.
While many borrowers who take out payday loans undoubtedly pay them back on time without renewing the loan and incurring new fees, there are also borrowers who enter a cycle of debt that is hard to escape. Many of these borrowers have to declare bankruptcy or get rescued by friends or relatives to escape the debt trap.
McClure said a key reason for launching the initiative campaign is the growing proliferation of Internet payday lenders. She said six online payday lenders are already licensed to do business in Arizona, and three more licenses are pending.
An interest-rate cap, she said, is a way to address all payday lenders, whether they have storefronts or operate online.
"I think this is a true bipartisan issue," McClure said. "Some people, Republicans and Democrats alike, think payday loans are a necessary evil and that there's a market for these loans.
"But I think most people consider them a blight."
We agree. If the Legislature can't get rid of payday lenders, it's time to give voters a chance to do so.
We urge voters to get behind McClure's initiative and put it on the 2008 general-election ballot.
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