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Ad watch: Payday loan 'reform': Fox guarding henhouse

The industry wants to 'protect' consumers, but it doesn't disclose that Prop. 200 means locking in a maximum interest rate of 391 percent.

By J. FERGUSON
Sun Staff Reporter
Wednesday, October 15, 2008

Payday lending reform, on paper, sounds like a good thing.

Until you find out the reform is being touted by the industry itself. Unable to find a legislative compromise to extend current payday lending practices beyond 2010, the payday lending industry has spent nearly $12 million in an attempt to get Arizona voters to back their referendum, known as Prop 200.

The direct mail and newspaper ad asserts that the payday lending industry is in urgent need of reform in order to protect Arizona consumers. Opponents call the ad misleading and the proposition written solely to benefit the payday loan industry, not consumers.

The proposition would in fact decrease the interest rates on payday loans -- from 459 percent to 391 percent. The ads leave out that fact and also that if the proposition doesn't pass, interest rates will be limited to 36 percent. Currently, opponents estimate the average payday borrower pays back almost $800 to borrow $300.

Also known as the Payday Lender Reform Act, Prop. 200's underlying goal is to extend payday lending in Arizona beyond mid-2010, when laws governing the practice are set to expire.

Arizona Attorney General Terry Goddard, the Coconino County Board of Supervisors and the United Way of Northern Arizona are opposed to Prop 200.

IMAGES USED IN THE RECENT NEWSPAPER AD

(Large picture of a woman holding her young daughter in her arms, standing in front of what appears to be the entrance to a hospital's emergency room)

TEXT OF THE RECENT NEWSPAPER AD

Needing a payday loan in an emergency is one thing. Reforming them is just as urgent.

Vote YES on Prop 200.

Thousands of people use a payday loan when facing an emergency. Most Arizonans agree we need to make payday loans better. We need to reform them now.

Prop 200. Reform that's good for Arizona.

Voting Yes on Prop 200 means tough new regulations to protect consumers.

Lower fees

Eliminates loan extensions with extra costs ending the revolving cycle of consumer debt

Provides flexible repayment plans to give borrowers more time to repay

Mandates all loan contracts to be written in clear, easy-to-understand language

On Tuesday, November 4th, you have the power to reform the payday loan industry and make payday loans better for Arizona.

ACCURACY

Prop 200 would, in fact, lower payday loan fees. The industry would decrease their current maximum annual rates on unpaid two-week loans from 459 percent to 391 percent.

However, the defeat of Prop 200 would lead to even lower interest rates. Prop 200 seeks to indefinitely extend laws governing payday lending in Arizona, which are set to expire on July 1, 2010. Without that extension, the Arizona Consumer Loan Act will cap the annual interest rates at 36 percent for loans.

The initiative would also eliminate the ability to extend loans as claimed in the ad by establishing a one-day cooling off period before issuing another loan. However, the one-day gap between paying off a loan and getting a new loan will not necessarily end the cycle of debt some consumers are locked into. A person could simply get a new loan to address outstanding debt a day later.

Data from the nonprofit Center for Responsible Lending shows 90 percent of repeat loans are made shortly after a previous loan was paid off.

The proposition, if adopted, would allow consumers to establish a payment plan but only if requested by the customer.

Currently, consumers with loans can pay back the loan as little or as much as they want during the two-week period.

J. Ferguson can be reached at 556-2253 or jferguson@azdailysun.com.

Proposition 200: Payday Loan Reform Act. This would override a current law that will otherwise put payday lenders out of business in Arizona in 2010. The measure would reduce what lenders could charge slightly, from $17.85 per $100 for the two week loans to $15.

Arguments for: The payday loan industry, which crafted and is financing the campaign, argues there is a place in Arizona for the high-interest, short-term loans. They say the state should not dictate what options are available to consumers, particularly those without credit histories that let them borrow for less.

Arguments against: Opponents note that the effective annual interest rate even with the change would be 391 percent. They say the loans prey on people's ignorance of the terms and that people end up not being able to repay the amount.

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