By Bill Coates, Arizona Capitol Times
September 19, 2008

Prop. 200 supporters say their payday-loan initiative would help people like David Jepsen. Opponents argue it would perpetuate an industry that put Jepsen behind the eight ball in the first place.

Jepsen is manager of Cheuvront’s Restaurant & Wine Bar in Phoenix. It’s owned by Sen. Ken Cheuvront, D-15.

In brief phone interview, Jepsen summed up his payday-loan experience.

“It’s brutal,” he said.

He borrowed $500. The fee on that was $87.50 – $17.50 for each $100. To cover the loan, Jepsen wrote out a check for $587.50, postdated until his next paycheck. When payday came around, however, Jepsen couldn’t cover that entire amount.

And with payday lenders – as the law is currently written – it’s all or nothing.

“You’re unable to pay off the loan in increments,” Jepsen said. “You have to pay it off completely. And you’re strapped, in financial trouble. That’s the hard part.”

Jepsen ended up “rolling over” the loan – several times. And each time, he paid another $87.50 on the $500 he originally borrowed. Under the law, a lender can roll over a loan three times. In Jepsen’s case, that would have been $350 on the original $500 loan.

Here’s where Prop. 200 comes in. Supporters – funding for the Nov. 4 ballot measure has come entirely from an industry trade group – say the initiative would get rid of abuses of the kind faced by Jepsen.

For starters, it would cap the fee per $100 at $15, a $2.50 savings. Checks would no longer be needed. Lenders could deduct the debt through an electronic-funds transfer.

In addition, Prop. 200 would bar rollovers, said Stan Barnes, a political consultant who chairs the Yes On 200 committee, the industry-backed sponsor of the initiative, formally known as the Payday Loan Reform Act.

“Under the initiative, there is no more loan extension for a fee,” Barnes said. “There is no more rollover.”

In addition, Barnes said, the initiative requires the lender to work out a flexible repayment plan – at the borrower’s request.

The initiative would allow the borrowers to split up a loan – say $500 – in four equal payments of $125, plus the fee, payable each payday. The lender can offer a customer one repayment plan a year.

But Prop. 200 opponents say these changes fall far short of meaningful reform.

“Our campaign is that Prop. 200 is no reform at all,” said Sen. Debbie McCune Davis, D-14, chairwoman of Arizonans for Responsible Lending, the main opposition to Prop. 200.

Even with no rollovers, lenders could offer new loans on the amount originally borrowed. On a $500 loan, the borrower could sign a new contract, paying another $75 fee, the new cap. The borrower, unable to pay, could keep signing new agreements for the next payday. Each agreement carries another fee on the same $500 debt.

Jepsen says he has stopped rolling over the $500 he took out originally. He now signs and re-signs new agreements on it. Overall, he says, he’s probably paid $1,000 in fees on the original $500 loan.

As for the $15 cap, the Arizona Consumers Council has a calculator on its Web site. It figures that a two-week loan – taking the borrower up to the next payday – carries an annual rate of 391 percent.

Barnes has said, however, payday loans are fee-based – like bounced checks. And Prop. 200 backers say a bounced check carries a much bigger fee. With a payday loan, a person can avoid that.

The payday-loan industry says Prop. 200 will curb excesses. Through the Arizona Community Financial Services Association, backers have raised nearly $9 million to get the measure on the ballot. More than $3 million has been spent on direct-mail advertising.

The slick mailers say the initiative would subject payday lenders to more rigorous standards, even driving some out of business. It would cut down on Internet payday loans. And, as already mentioned, it would lower fees and provide repayment plans.

McCune Davis says she has received a half-dozen mailers herself.

“I laughed because they actually referred to themselves as unscrupulous on one of the fliers,” she said. “So, they’re using scare tactics about their own business practices to get people to vote to let them to continue to do business in the state.”

With a $9-million campaign, the industry might not be running scared. But it is fighting for its existence.

The law regulating – and allowing – payday loans has a July 1, 2010, sunset provision. When it lapses, payday lenders could charge no more than the 36 percent annual interest, the same cap for other consumer loans. And that would drive many of them out of business.

That’s just what the opponents want, Barnes said. The industry is taking its case to the voters because the Legislature has chosen to let the industry die, instead of fixing it, he said. And eliminating payday loans means less choice for consumers.

“That presupposes that people cannot make rational decisions with their own money,” Barnes said.

Barnes has an ally in House Democratic Whip Steve Gallardo, who argued in favor of Prop. 200 in the voter publicity pamphlet.

Many people are now struggling financially, Gallardo wrote in his argument.

But he noted: “Not everyone can walk into a bank and borrow money, and not everyone has a credit card to use when unexpected bills arrive. Access to credit is a key issue in a down economy.”

On the other side, West Valley civic group Westmarc and the Arizona Education Association submitted arguments against Prop. 200.

AEA President John Wright said payday loans only put struggling families deeper in debt. Westmarc CEO and President Jack Lunsford said payday loans take advantage of military families. That would include West Valley families stationed at Luke Air Force Base.

Federal law prohibits military personnel and dependents from taking out payday loans. Prop. 200 would make it a violation of state law as well.

McCune Davis said some Valley cities have come out against Prop. 200. Payday-loan stores, she said, hurt property values, But as long as they’re legal, she said, cities “can’t keep them out.”

In addition, she said, they bleed communities by sending profits to out-of-state corporate offices.

“They pull more money out of those communities than the cities get in federal aid,” she said.

Barnes said Prop. 200 opponents are making arguments that simply don’t hold water. In addition, he said, opponents are “simply following their own political agenda.”

It’s a poorly funded political agenda. McCune Davis’s group reported raising $100,000. If money is any indication, fighting the proposition will be an uphill battle.

Both sides can agree on one thing, however. If voters enact Prop. 200, the law would be nearly bulletproof. The Legislature cannot repeal or weaken a voter-approved act, only amend it in a way that “furthers its purpose.” And that takes a three-fourths majority in each chamber.

Largely for that reason, the ordinarily pro-business Greater Phoenix Chamber of Commerce opposes Prop. 200.

The chamber isn’t opposed to payday loans in principle, said spokesman Todd Sanders.

But he added: “With this kind of solution, and in particular, one industry, you’re never going to have the option to change it, and you’re going to voter-protect one industry.” ?

Email Bill Coates, Arizona Capitol Times at
bill.coates@azcapitoltimes.com

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