U.S. Senate Must Safeguard Arizona’s Payday Reform Law

We must ensure Arizonans keep their longstanding protections from predatory lenders.

By Bartlett Naylor

A payday loan store. Author: Aliman Senai

Arizona boasts a proud history of protecting citizens against predatory lenders. But now, as the state faces economic struggles from the pandemic, and people are needing loans to make ends meet, a recent Washington ruling threatens to eviscerate some of those protections. With the help of Arizona’s senators, Congress can end this threat.

What’s at issue are payday loans, Arizona’s law limiting the cost of these loans, and a scheme by the payday loan industry to circumvent that law.

Payday lenders offer high-cost loans in small dollar amounts. Nationally, some 12 million Americans take out payday loans when they face dire financial straits. In other states, the fees attached to these loans can reach an annual percentage rate exceeding 400%.

According to the U.S. Consumer Financial Protection Bureau, (CFPB) “These loans are heavily marketed to financially vulnerable consumers who often cannot afford to pay back the full balance when it is due. Faced with unaffordable payments, cash-strapped consumers must choose between defaulting, re-borrowing, or skipping other financial obligations like rent or basic living expenses such as buying food or obtaining medical care.”

Most borrowers refinance their loans, racking up expensive new charges. About one in four payday loans are reborrowed nine times or more, with the borrower paying “far more in fees.” As Arizona’s attorney general warned: “Although the monthly payment amount may be low, the extra fees increase the total cost of the loan.”

Arizona permitted payday lending until 2010, when it ceased licensing such firms. It also set a consumer loan annual interest rate cap of 36%. Arizona voters and state lawmakers defeated two attempts — in 2008 and 2017 — by the payday industry to remove or reduce protections.

For two decades, the industry has attempted to work around the law in Arizona by allying with national banks. National banks are exempt from state usury laws outside their home state. So payday lenders and certain banks perform a do-si-do dance, using what’s called a “rent-a-bank.” Here’s how it works:

Consumers apply for a loan with a payday lender. That lender then sends the application to a national bank. These aren’t major banks such as Bank of America, but small outfits often based in Utah. The bank sends money to the consumer and then sells the loan back to the payday lender in exchange for some of the profit. The borrower then pays back the original payday lender.

Until in 2020, this rent-a-bank scheme was subject to legal challenges, but in late 2020, the U.S. Office of the Comptroller of the Currency (OCC) ruled that it was permissible.

Congress can overturn the OCC’s ruling through the Congressional Review Act, an expedited procedure for striking down agency rules, but there’s a time limit. Both chambers of Congress must act by the middle of May.

If it comes up for a vote in the next few weeks, it’s likely to be close, because the payday industry donates generously to many lawmakers’ campaigns.

While U.S. Sen. Kristen Sinema (D-Ariz.) hasn’t yet declared her position on the Congressional Review Act resolution addressing payday loans, there’s reason to believe she will be supportive of overturning the OCC rule: As a state legislator, she sponsored legislation in 2007 during the fight that eventually led the state to ban payday lending.

Numerous Arizona organizations support protections against predatory lending, including the Southern Arizona Grandparent Ambassadors, Valley of the Sun United Way, and the William E. Morris Institute among others.

We urge Sinema to stand strong with these local leaders and ensure Arizonans keep their longstanding protections from predatory lenders.

Public Citizen is a national, nonprofit advocacy org that has been standing up to corporate power and holding government accountable for 46 yrs.

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