Flagstaff, AZ – You've probably seen those anonymous looking storefronts around Arizona advertising payday loans there are over 700 of them in the state. But odds are you've never taken one out. Still, how you vote on Proposition 200 next week will help determine the future of the payday lending industry in the state. Arizona Public Radio's Daniel Kraker has the second story in our series on the ballot initiatives.
Here's a trick question. Who's paying for this TV ad on Prop 200?
(Sound from TV ad)
"Arizonans agree. Payday lenders who take advantage of hardworking families, need to be stopped. Vote yes to pass hard hitting reforms to bring the payday loan industry under control."
This commercial, believe it or not, is bankrolled by the payday lending industry, which has pumped 14 million dollars into the campaign to pass Proposition 200
Here's what it would do. It would lower the fees on payday loans. Currently borrowers pay $17.65 for every one hundred dollars borrowed, which they have to repay when they get their next paycheck. Prop 200 would lower that fee to 15 dollars.
It would also make it illegal for a lender to roll over a payday loan and charge another fee, and it would allow customers who can't meet their obligation to create a repayment plan.
But those reforms aren't enough for Jennifer Harris, president of Coconino County Credit Union.
"Currently they're charging up to 451 percent for a payday loan, prop 200 reform changes that to 391 percent, which we don't feel is reform at all."
Harris acknowledges that payday loans can seem like a good deal up front
"But when payday does come around, are you going to have that extra money that you didn't have before to pay the payday lender, and then continue to live for another 2 weeks until you get paid, the fees tend to add up, 90 percent of payday borrowers have 4 or 5 loans out at a time, it's a very hard thing to get out of."
It's a story Miquelle Sheyer with Coconino County Community Services has heard before. This summer a county employee took out a 500 dollar payday loan. But after two weeks, they couldn't repay it.
"They extended it for an additional fee, extended it, ended up borrowing money to pay the first loan, and now they've lost their home."
That story and others like it helped convince the Coconino County Board of Supervisors to publicly oppose prop 200. But Stan Barnes, chairman of the Vote yes on 200 campaign, says the initiative would make it much more difficult for borrowers to get trapped in that spiral of debt.
"The reforms built into this proposition answer the assertions by the other side, what the other side doesn't like is payday loans, they want to eliminate them, period."
And Barnes argues that a down economy is not the time to eliminate a credit option for people who live paycheck to paycheck.
"Payday loans are not evil, they are a perfectly rational credit option for some people, and the reason people make the rational personal decision to borrow for two weeks until their next paycheck, they're simple and convenient, the fee, is less expensive, cheaper than the fees that come with bouncing a check, or overdrafting a credit card."
"We need to find another mechanism to deal with people that are having financial problems."
Tom O'Halleran is a republican state senator from Sedona. He says the reason the payday loan industry is pushing this initiative now is because the legislation authorizing it is set to expire in 2010.
"What they're afraid of is the sunset, once that sunset goes, the whole industry goes, they don't tell you that on their ads."
Consumer advocates and the payday loan industry are watching Arizona closely, as well as Ohio, where a similar initiative is also on the ballot. 14 states have already passed laws capping the interest that lenders can charge at 36 percent. That's the rate that lenders would have to abide by in 2010 if Prop 200 doesn't pass. It's also a rate the industry says would effectively put it out of business.
For Arizona Public Radio, I'm Daniel Kraker.