While Arizona recovers from an economic crisis rooted in predatory lending practices, a bill just signed into law by Gov. Jan Brewer creates another round of risky loans not too far removed from the horrific payday-lending loans now mostly a good-riddance memory.
HB 2526 allows huge increases in interest rates on consumer loans of $3,000 — up to 36 percent — and doubles loan-origination fees from $75 to $150, a troubling proposition leaving Arizonans footing the bill for consequences of high-cost debt while benefiting primarily out-of-state lenders.
The new law essentially allows the loans without regard to a borrower’s ability to repay. And, as if fees and interest weren’t enough, these loans come stacked with more fees for nearly useless insurance products providing little to no benefit to borrowers.
It‘s easy to see how a loan pitched as a productive quick fix is actually designed to sink borrowers into inescapable high-cost debt through a despicable cycle of refinancing and flipping.
The proof is in the lenders’ own data. Companies making these types of loans report that more than 70 percent of the loans have been refinanced from existing loans. This telltale sign of predatory lending — flipping borrowers over and over to collect new fees — became all too familiar during the mortgage crisis.
This is also an obvious sign that these high-cost consumer loans are not structured to be affordable, even at the outset.
Nor do they encourage borrowers to graduate to cheaper forms of credit or other means of addressing financial stress.
Instead, once lenders make the first loan based on these unsustainable terms, the result is typically a long-term debt cycle making it virtually impossible to build assets for the long term.
In addition to high costs and churning, equally troubling is that these loans will likely be bundled and sold right back to Wall Street.
Finally, while the bill’s supporters asserted that expanding this type of unsafe lending would curb abusive car-title loans, adding another predatory product to neighborhoods already saturated with similar no-out options was not the answer.
If the Legislature wanted to address car-title-loan abuses, it should have been done it directly, and we would have supported those efforts.
Instead, weak excuses deflected focus from a law that now allows predatory lenders to push already-struggling Arizonans deeper into debt.
For these reasons, AARP, the Center for Economic Integrity and Community Action Agencies, which provide support and services to the newly poor and the working poor, along with many other groups, are incredibly disappointed in Arizona’s elected officials, who could have prevented predatory lending by opposing HB 2526 from the get-go.