PHOENIX โ Attorney General Mark Brnovich has given the go-ahead for an Illinois firm to โlendโ up to $12,500 to Arizonans without state regulation โ and potentially at a higher cost than state law allows traditional consumer finance companies to charge.
The reason, according to a key Brnovich aide, is that, technically speaking, the company is not making a loan. Instead, itโs an โincome sharing agreementโ, with the company โinvestingโ in someoneโs future earnings and hoping to get back more than they put in.
The company, Align Income Share Funding, provides cash to individuals based on a promise by borrowers to pay back a fixed percentage of their income for up to five years.
Adam Ginsburgh, the companyโs chief operating officer, said that link provides a significant advantage to consumers: If theyโre out of work through no fault of their own, the requirement to make payments stops.
He said the borrower is freed from any obligations at the end of the period even if all the payments have not been made โ and even if the amount repaid is less than advanced.
But the company is in business to make money. And Ginsburgh said it uses underwriting standards to determine how many monthly payments are required.
There is no requirement to comply with federal โtruth in lendingโ regulations, which require borrowers be given a sheet showing them the effective interest rate. He said, though, the borrowers do get sufficient information to allow them to compare what Align is offering with a more traditional โ and state-regulated โconsumer loan.
Brnovich was empowered to authorize exemptions from consumer lending laws under a new state law creating a โsandboxโ for companies to try out new or unusual financial programs in Arizona. Aide Ryan Anderson said what Align is doing meets the test.
โAllowing Align into the sandbox is about giving a potentially new business model the chance to show that itโs different under state law,โ he said. โWe think they have a legitimate argument that itโs not a consumer loan under state law.โ
Anyway, Anderson said, itโs very possible that Align could do what it wants in Arizona, providing money to Arizonans under payment terms, with โ or without โ Brnovichโs permission.
โIf itโs not a consumer loan, they donโt need a license, and there wouldnโt be any government oversight,โ he said. โHere, we have a chance to see how this works in a controlled environment, how the company interacts with consumers, and ultimately whether their product proves out.โ
And since itโs not a loan, Anderson said, the cap of 36 percent annual interest rate in Arizona law does not apply.
Ginsburgh said thereโs nothing novel about the concept. He said companies have been around for awhile that make loans to college students, with repayment based not on a fixed schedule of payments on a regular basis but instead their future earnings.
โWe thought that that same mindset could be applied to working consumers, not just students, for general household purposes,โ Ginsburgh said.
The amount of funds available, he said, is anywhere between $1,500 and $12,500, with the average contract in the $5,500 range. Customers get a repayment schedule running from two to five years, with the obligation being no more than 10 percent of someoneโs income.
The plus for the customer, he said, is that link to the earnings.
Ginsburgh used the example of his company providing $5,000 to a consumer over a three-year contract.
โIf they are serially unemployed or they have volatility in their income, and theyโre making their prescribed payments to us โ even if those payments are zero because theyโre unemployed โ and over the life of the agreement they only pay us back $4,000, thatโs it,โ he said.
โThe agreement ends,โ Ginsburgh said. โThereโs no catch-up, no kind of balloon at the end. That is the equity-like risk we are taking.โ
But the system is built on the assumption that Align, having gotten information on the personโs income, credit score, education level, industry of employment and the proposed use of the proceeds, ultimately will get back more than the amount advanced.
โWeโve built our own underwriting model that we use to quote each applicant a term of their agreement and a percentage of income to fund them,โ Ginsburgh said. โIt varies, person by person, based on their own unique factors.โ
That still leaves the question of the interest rate, something that might be useful to customers in deciding whether to agree to the deal.
โBecause we are not a licensed lender in the states that we operate, we are not obligated to provide an APR because we donโt know what the cost of funds is going to be over the life of the agreement,โ Ginsburgh said.
But he said the contract has โsignificant disclosures that allow them to compare the potential cost of an ISA to a loan in different income scenarios.โ
That means one set of figures if someoneโs income goes up during the life of the agreement and another set if someoneโs income goes down.
Ginsburgh said heโs not concerned that someone might choose to forego or delay a raise to avoid having to pay more to Align. He said that since the maximum take of someoneโs income is 10%, that still leaves the customer with the other 90% of any pay increase, more than enough incentive to take the raise.
And he said that if someone has a sudden windfall, the deal can be ended with a buy-out at less than the person would have paid had the contract run its full length.
Anderson said the company already does business in other states, including California, which he said has much stricter lending laws than Arizona.
