With the law allowing payday loans about to expire, shops across Tucson that offer them are now emphasizing auto-title loans, and check-cashing and money wiring services.
Meanwhile, consumer watchdogs are keeping an eye out to ensure new methods don't emerge that ensnare individuals in new spirals of debt.
Payday lenders operated under a law that allowed "deferred presentment transactions," in which a lender cashes a check it knows isn't good and waits two weeks to present it to the bank. In return the borrower pays fees reaching nearly $18 per $100 borrowed, which works out to an annual percentage rate higher than 400 percent.
On Thursday, such transactions will be illegal.
That means people who've become dependent on the loans for everyday expenses - sometimes rolling them over week after week as fees pile up - may hit a financial brick wall, said Kelly Griffith, co-executive director of the Center for Economic Integrity.
"There's going to be quite a few borrowers who go in to renew their loans, and they're not going to be able to do that," Griffith said.
The payday lenders themselves will be losing a major chunk of their cash flow, said industry lobbyist Lee Miller. Some of them, especially locally owned ones not backed by a national chain, may close, he said.
The expiration of the law leaves the lenders exploring other financial products, Miller said.
"With payday going away, that's motivating different companies to look at options to figure out what will work and what meets the needs of their customers," Miller said.
Arizona voters overwhelmingly shot down a 2008 ballot initiative that would have kept payday lending alive. Attempts in the Legislature to extend the law never gained traction.
Even as the law dissolves, Griffith said her organization would watch the businesses closely. Other states that have cut off the short-term loans have seen the companies turn to questionable lending practices, she said.
"Some payday lenders may try to exploit any loopholes they find in the law," Griffith said. "It's one thing to have the sunset occur; it's another thing to ensure payday lenders are following the law."
But Miller said the businesses have several legal options when it comes to products they can offer customers. Everyone should have a good relationship with a financial institution, he said, but payday-lending companies provide an option for people who need money late at night or early in the morning. The high cost of the loans, he said, is partly because the companies have to maintain brick-and-mortar stores that stay open long hours.
In addition to check-cashing and money-wiring services, many of the companies have begun to offer auto-title loans to offset the loss of payday-loan business. "But it's a very different product and a very different clientele," Miller said.
Auto-title loans are closer to traditional loans, using the vehicle as collateral, while payday loans are more typically used by people in a short-term financial bind, Miller said.
If a consumer falls behind on an auto-title loan, the lender can seize the vehicle.
Many of the state's payday-loan operations have applied for auto-title loan permitting, said Attorney General Terry Goddard.
"There is a massive shift going on," Goddard said.
He cautioned consumers that, over time, auto-title loans can be expensive because they are exempt from the 36 percent cap on the annual percentage rate. Under state law, consumer loans with annual interest rates higher than 36 percent, plus authorized fees, are illegal without an exemption.
'We're very concerned'
Auto-title loans should be given only to the owner of the vehicle being used as collateral.
If a lender says ownership of the vehicle and its value are not important, the borrower should proceed with caution and consider contacting the Attorney General's Office, said Goddard, who is running for governor.
Also, some companies, sometimes based out of state, may try to convince consumers they can offer them payday loans online. The Better Business Bureau of Southern Arizona has already seen online companies emerging that say they are exempt from state and federal laws, said BBB spokesman Nick LaFleur.
"We're very concerned about online payday lenders," LaFleur said. "They're already around, people are already losing money with them and there would be a concern that people would start using those more."
One consumer, Sherry Hinojosa, recently told the BBB that after borrowing $300 from an online payday lender she was unable to find out how much she owed - even as she watched $60 and $70 payments drain from her account month after month, she said.
As of Thursday, any company - even those on the Internet with locations in different states - trying to sell payday loans in Arizona is breaking the law.
"If anyone is approached by an Internet lender that says they can make this (payday) loan in Arizona, that's not true," Goddard said.
Miller, the industry lobbyist, said most payday lenders follow the law carefully and serve their customers well. Those customers - many of them low-income consumers trying to bridge gaps in their budget - will soon be left with few options, Miller said.
"Customers who need a payday loan or want an auto-title loan are customers who are frustrated and annoyed with banks and credit unions as a general proposition," Miller said.
For that reason, those people go to payday-lending shops because they are better able to meet their needs, he said.
Griffith, of the Center for Economic Integrity, disagreed. Those consumers would likely be able to get a small loan from a credit union or a bank if they were better informed about their options, she said.
She said her center has been working with Arizona credit unions on programs designed to help middle- and low-income families saddled with debt. Also, most people using payday loans are struggling with their finances every day, not just for a one-time emergency, she said. Those people often need to completely reexamine their finances, which is best done by reputable financial institutions, she said.
"They are really geared toward asset building," Griffith said. "It's about helping people get on their feet and stay on their feet."
OPERATION SUNSET
Attorney General Terry Goddard has appointed a task force, called Operation Sunset, to investigate companies that may make illegal payday loans.
Companies can't offer the loans after June 30 and should take down any signs indicating they do by then, Goddard said.
Consumers who think a company is making payday loans illegally can contact the task force at operationsunset@azag.gov or at 866-879-5219.
FINANCIALLY STRESSED?
Payday lenders should offer terms to work out payments of existing loans, said Attorney General Terry Goddard, but it will soon be illegal for them to roll the loans over into new ones.
A list of licensed consumer lenders that can lend up to $10,000, with interest capped at 36 percent plus some additional fees, is available at azdfi.gov/Lists/CL_List. HTML
Several Arizona credit unions are also participating in a program called REAL - Relevant, Effective, Asset-building, Loyalty-producing - Solutions, to provide financial services for middle- and low-income households struggling with debt. Information and a list of participating credit unions is at www.azcreditunions. org/consumer/ConsumerRealSolutions.aspx
Consumers now relying on payday loans can contact Take Charge America at 1-866-750-9630 on Wednesday and Thursday for advice on other options.
Contact reporter Dale Quinn at 573-4197 or dquinn@azstarnet.com
