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Payday-lending reform bill is next to useless

May 5, 2006 - Tucson, Arizona

The Legislature overwhelmingly passed a payday lending bill, and last week the governor signed it. But this is no cause for celebration.

"It's not much of a bill," Rep. Marian McClure, R-Tucson, told me Wednesday. "But it's better than no bill at all."

It is better than no bill because one provision has a small amount of value. But the limited benefits apply only to members of the military and their spouses. The bill ignores the majority of borrowers.

That is the bad news. The worse news?

This is one of those bills that allow legislators and the governor to claim they have accomplished something when they haven't. Of course, in an election year, that ability to claim action, especially on something relating to the military, is important to elected officials.

And here's an even worse possibility: Some of the legislators might have deluded themselves into believing they passed a noteworthy bill. Then they likely would wash their hands of any future efforts to rein in the loan companies that prey on the vulnerable, including low-ranking members of the military.

On April 18, Senate Bill 1006 passed the House 53 to 3, with four members not voting. The following day, it passed the Senate 22 to 4, also with four non-voters. Then Gov. Janet Napolitano signed it on April 25.

If you want an indication of how meaningless the new law is, consider this: The payday loan industry in Arizona vigorously opposes every significant reform, but its lobbyist supported this law.

The new law makes mandatory the payday loan industry's voluntary code of behavior, called "Military Best Practices." That may sound worthwhile, but federal law and Department of Defense regulations already cover the key areas.

"As far as I can ascertain, adopting the Military Best Practices doesn't hurt anything," Kelly Griffith, deputy director of the Southwest Center for Economic Integrity, told me. "But it doesn't do a whole lot of good, either. . . . It's already part of law on a higher level, and it hasn't stopped military service personnel from getting caught in a debt trap."

The law's sole, minimally useful reform is there only because of McClure's efforts. It prohibits companies from renewing loans to members of the military or their spouses.

Here's the way that works. When people borrow from payday lenders, they write a check and date it two weeks in the future. Then when the two weeks are up, the borrower must come in with the money to cover the amount of the check.

Frequently, people don't have the ability in just two weeks to pay off the loan, particularly if they needed the money for an emergency or to pay the mortgage or make a car payment. So the companies roll the loans over, charging their 17.5 percent fee all over again. As you might imagine, borrowers rolling over the loans quickly can find themselves mired in the quicksand of ever-increasing debt.

Presumably, then, prohibiting the companies from rolling over loans to members of the military should keep service members from getting trapped. And I'm sure it will work in some cases.

But there are two problems with that solution. First, it inadvertently encourages lenders to begin formal collection procedures sooner, including filing suit against defaulting borrowers. Consequently, the hapless borrowers can end up owing court costs, too.

Second, there are ways around the no-rollover law. Sometimes lenders essentially just ignore it. Other times, borrowers will go down the street to a second payday lender and borrow the money to pay off the first lender.

Arizona law doesn't allow either activity. But there is no database of borrowers that lenders must check, and there is no punishment for ignoring the law. The law even winks by allowing lenders to take the borrowers' word that they don't have another loan.

Even so, Griffith suggests the no-rollover provision for members of the military may open the door next year to expanding the prohibition to include civilians. That would be a good, though modest, next step.

An even better idea is to eliminate payday lending altogether. Much to my surprise, McClure believes momentum has built in the Legislature to do just that.

I'd like to believe McClure is right. It is comforting occasionally to see fairness and justice prevail.

A note: My column originally ended there. But Thursday morning I received this e-mail that I want to add. It painfully shows the traps that ensnare borrowers from payday lenders and their cousins, the auto title loan companies:

"I went to Speedy Cash and got a title loan on my 97 Dodge Stratus for $600. It was due in full in 30 days or I could pay $104 plus a $15 document fee to continue my loan. I paid to continue it for a few months, but I could never come up with enough money to pay them their finance charge and pay some towards my $600. They repossessed my car yesterday. I called them and they said they will sell my car in 10 days unless I give them $1,285. I have a 16-month-old daughter to support, and with no car I'm going to lose my job. Any advice would be appreciated.

"Thank you, Kristin Ronning."

News Source

Arizona Daily Star, Jim Kiser, Editorial Columnist

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