Consumer advocate: Predatory lending still ‘major problem’ in Arizona

by Adnan Alam

By ANTHONY MARROQUIN
Cronkite News

PHOENIX – Consumers nationwide have submitted nearly 10,000 complaints with the Consumer Finance Protection Bureau about short-term consumer loans they believed were unfair, according to a recent analysis conducted by the Arizona PIRG Education Fund. The complaints were submitted over the past two and a half years.

The analysis proves there’s still a “major problem” with this type of lending – both nationwide and in Arizona, according to the Arizona Public Interest Research Group.

Congress created the Consumer Finance Protection Bureau in 2010 to oversee mortgages, payday loans and other consumer borrowing.

The Arizona group’s analysis found that 91 percent of the complaints that contained written explanations dealt with some sort of unaffordability, and that of all the loan options, payday loans seemed to be the most complained about.

In 2010, Arizonans voted to ban payday loan businesses from the state. Critics pointed at triple-digit interest rates and aggressive collection techniques that earned them the title of “predatory loans.”

“The problem is that title lending is still legal in Arizona,” said Diane Brown, executive director of the group. “So while Arizona voters banned payday lending at the ballot box … every year since then, new attempts have been made to revitalize that industry, and we have seen an emergence of title lending over the last several years.”

Arizona has the seventh most-concentrated title loan market in the country with one outlet for every 8,072 adults, according to a report from the Consumer Federation of America and the Southwest Center for Economic Integrity.

The report said the number of title loan outlets grew from about 160 locations in 2008 to more than 630 in 2015, which exceeds the number of payday lenders that surrendered their licenses in 2010.

Brown said these businesses “encourage consumers to come on in, and they can get that loan immediately and help to pay their bills. The problem is that once a consumer is putting up their car title. … They often would be faced with a triple-digit interest rate that either they weren’t apprised of at that time, or they were somehow convinced that they would be able to pay it.”

Arizona also has seen the rise of flexible-credit loans – better known as flex loans – and registration loans, where you can borrow money without owning your car. All you need to do is show that you have the registration to it, according to several registration loan websites.

Critics point at the loans’ high interest rates as a sign that these relatively new forms of lending in the state are just efforts by the lenders to pick up where payday loans left off.

“Even though we don’t have payday loans technically in Arizona, we still have auto title lending, which have (triple digit interest rates),” said Cynthia Zwick with the Arizona Community Action Association.

But proponents of the loans say the high interest rates are necessary because of the nature of the business.

“In order to be able to service that need – small dollar, short-term, challenged credit profiles – you have to charge a rate of return on the loan that allows the business to make a profit,” said Scott Allen, president of the Arizona Title Loan Association. “Businesses that don’t make profit, that’s called charity.”

Both sides do agree the key to a safe and secure loan is for the consumer to be knowledgeable about the terms and whether he or she can repay the money. However, both sides have different opinions on how that should be done.

“(It’s important that) people know what they’re options are, and that they have a chance to understand – before they enter into a contract – what the implications might be,” Brown said.

That means more regulations from the Consumer Finance Protection Bureau, Brown said. Without national regulation, the incentive for stronger education and prevention laws would be missing, she added.

The Arizona Title Loan Association, on the other hand, said consumers are smart enough to decipher when they enter a loan agreement they cannot pay back.

“If somebody says to me that, ‘I think that these customers are better off without having access to credit,’ I can’t accept that argument,” Allen said.

Allen also added that limiting consumers’ access to these businesses would be a huge mistake, given that the only reason they have thrived is because there is such a demand for short-term loans.

“If they could get it somewhere else for less money, why wouldn’t they be going there already?” Allen said.

The CFPB is considering national legislation that would prevent lenders from issuing more than six loans a year before verifying whether the consumer can afford another loan, among other provisions to stop debt traps.