By Howard Fischer Capitol Media Services
PHOENIX — The backers of a new initiative are seeking to ban securities lending — or at least the interest rates they are allowed to charge.
Legal documents filed late Wednesday ask voters to remove the exemption the industry now enjoys from state laws that limit eligible interest to a maximum of 36% per year. Current title loans can carry an annual percentage rate of up to 204% per year.
Supporters need 237,645 valid signatures by July 2, 2020 to put the question on the general election ballot that year.
The move is encouraged by many of the same organizations that succeeded almost a decade ago in eliminating so-called “payday loans,” where people could borrow up to $500 for two-week periods — at effective interest rates that may exceed 400 percent.
However, vehicle owners were given the option of borrowing against them.
The industry has stretched the law to the point where people don’t even need to have a clear title to their vehicles to borrow against them, said Kelly Griffith of the Southwest Center for Economic Integrity, one of the groups to the origin of the initiative.
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“They’re exploiting this loophole,” lending money to those who can’t afford to repay and therefore have to keep taking new loans, she said. “It’s another name for payday loans.”
In 2008, voters decided to kill the payday loan industry, despite lenders spending more than $17 million campaigning to keep it alive.
Since then, the Consumer Federation of America and the Center for Economic Integrity released a report showing that the securities lending industry has exploded in Arizona.
There have been several legislative proposals to rein in the industry and cap eligible interest at 36%.
Each of these failed in the Republican-controlled legislature. This leaves industry haters the opportunity to present their case directly to voters.
The initiative is likely to get a fight from the industry, which has argued that it provides an option for people who don’t have access to easy credit at regular interest rates. i.e. less than 36% APR.
“Our clients are individuals who can’t get those rates,” said Stuart Goodman, who lobbies for the Arizona Title Loan Association. Most customers have no relationship with banks, he said.
“We’re dealing with high-risk people with bad credit who have some sort of instant short-term credit need,” he said. “They are not served by the traditional banking community because of the associated risk.”
Griffith said she believes the industry is effective in encouraging people to borrow.
“If you don’t have enough income to meet your basic cash flow needs, whatever they are…what are the chances that you will be able to repay this loan?” she asked.
“It drives people into bankruptcy, into closing checking accounts, into addiction,” Griffith said. “So the consequences are huge.”
Goodman, however, said eliminating title lenders in Arizona would not solve the problem. He said that would only drive people to Internet and offshore lenders, which have no physical presence in Arizona and whose practices are not overseen by state regulators.
But Griffith said she thinks there are other solutions. She said some of the customers likely have access to credit cards, which they can use to charge for things like car repairs and tires to get to work to keep earning money. Interest rates on credit cards are lower than with a lender in title, she said.
And for those who don’t have such options, Griffith said there are charities that might be able to help.
Goodman said the 204% figure can be misleading.
This figure is based on the fact that the industry is allowed to charge 17% interest per month for loans of $500 or less.
But he added that the law provides tiered caps: 15% for those between $501 and $2,500, 13% for those between $2,501 and $5,000 and 10% for higher loans. Competition among lenders has resulted in offer rates lower than that, he said.
Griffith said the initiative has the support of several community organizations that will help raise the funds needed to get the measure passed. Some have experience in this area, including Living United for Change in Arizona, which was a key driver of the successful 2016 initiative to raise the state’s minimum wage.