Payday lenders, state reach deal on curbing fees

The state’s payday lenders have agreed to sharp new curbs on their practices and fees in exchange for ensuring they are not forced out of business in three years.

Crafted by Rep. Marian Mc-Clure, R-Tucson, the deal would prevent “rollovers,” where a lender essentially forces someone who cannot pay up in the two-week period to take yet another loan — and incur yet another fee.

Instead, lenders would be required to offer those without the necessary funds 90 days to repay.

More to the point, they could not charge additional interest or fees as long as the borrowers make the required interim payments.

That, said McClure, is significant as it drives the effective annual interest down from about 350 percent to less than 60 percent.

The lenders also agreed to new state oversight and limits on how often they can re-deposit a check that bounces. And there would have to be a 48-hour cooling-off period between loans.

What the industry gets is repeal of existing law that would “sunset” the practice in 2010. That would allow the more than 720 payday loan stores throughout the state to remain open.

“The statutory sunset date is a growing hassle for the industry,” said Lee Miller, who lobbies on behalf of the Arizona Community Financial Services Association which represents the lenders.

He said the question of what would happen in 2010 creates “uncertainty’’ for the industry, like whether to sign a new retail lease which typically has a five-year term.

McClure, who never has been a fan of the high-interest loans, said the industry’s desire for action now gave her the ammunition she needed to extract concessions.

The biggest, she said, is the repayment plan.

Those extensions would disappear. Instead, lenders would have to set up a plan of six payments over 90 days to let the borrower repay the money owed.

McClure said only if there is a default in any of the scheduled payments can the lender charge 3 percent of the unpaid balance.

HOW IT WORKS

1. Payday lenders agree to accept a check that they and the borrower know is not bankable and hold it for up to two weeks.

2. The borrower writes the check for 15 percent more than the amount he or she receives in cash.

3. The 15 percent markup becomes the fee for the lender.

4. Existing law allows borrowers to extend a loan up to three times. But each extensions constitutes a new loan — and a new 15 percent fee.

CLOCK IS TICKING

Lawmakers agreed to allow the practice in 2000 based on arguments that people with bad credit or no credit history who need money quickly would have no alternatives — other than, perhaps, an illegal loan shark.

But the legislators remained leery enough of the practice to give it just a 10-year trial run, setting up the law so the ability to offer these loans would disappear automatically on Jan. 2, 2010 without legislative intervention.

OTHER RESTRICTIONS

Other provisions in the measure include:

• A ban on payday loans being made over the Internet.

• Prohibiting lenders from re-depositing a check that bounces more than twice to rack up those $25 bad check charges.

• Fines of $5,000 per day per occurrence for violators.

• A requirement that documents be in English or Spanish at the customer’s request.

WHAT’S NEXT

The deal is set for review Monday before the House Committee on Financial Institutions and Insurance.