The Arizona ban and the financial reform bill

Grand Canyon

Will an Arizona style ban on payday lending happen with the Consumer Financial Reform bill? Image from Wikimedia Commons

The state of Arizona recently allowed the licenses of payday lenders for the entire state to lapse. Payday loan stores are in the process of closing their doors all over the state and are moving on to different pastures. Currently, the financial reform bill is awaiting the president’s signature. Part of the bill will create a new consumer financial protection agency within the Federal Reserve that will regulate consumer lending, and there is concern that a fate similar to Arizona payday lenders’ awaits all payday loan lenders nationwide.

Arizona stores closing up shop

A recent article on highlighted the effects of the new usury cap, or percentage rate cap the state of Arizona has imposed. At 36 percent interest, or rather, 36 percent annualized interest (on a two week loan), any payday lenders in Arizona are having a hard time keeping their doors open. Check’N’Go, one of the largest payday loan, cash advance and check cashing franchises in the country, immediately closed 11 of its 34 locations. The company employs more than 100 employees in Arizona, and all stores will be closed by the end of the summer. The remaining stores in the state will have to either resort to making car title loans or close their doors completely. Studies have shown greater incidents of bankruptcy, bounced checks, and debt collections after bans on payday credit.

Financial reform bill

Part of the financial reform bill is a new Consumer Financial Protection Agency, that will be housed inside the Federal Reserve. The bill, recently passed by the Senate, is awaiting the President’s signature. Payday lending will then fall out of the hands of the states, and into Federal jurisdiction. If the rate cap were to be imposed nationally, the entire industry will fold.

Who will the ban benefit?

It is thought that consumers will no longer be trapped by awful loans and high interest, or at least payday lenders will have to follow the same standards applied to mortgages and credit cards to cash advance loans. The only problem with that is that it costs almost $14 to lend $100 of payday credit, and 36 percent APR only yields a couple dollars per $100 loaned. Since payday customers aren’t accessing first tier credit because they don’t want to or can’t, what is going to take the place of short term loan lenders if they can’t lend and keep their doors open?

Further reading

AZ Central

Consumer Affairs

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