*AZ State Veterans Legislative Update 15March 2016: S/E S.B. 1316 – Predatory Lending

Subject for use on Email to be forwarded: S.B. 1316 S/E: ‘consumer lending; regulation, licensure’

SB 1316 is being heard in the House Council of the Whole (COW) today at 1315 Today

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Email addresses with Semi-colons for all members of the Arizona House of Representatives:

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House Addresses With Commas:

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Draft Message

Honorable State Representative

I wonder how many are aware of the whole story on the lending industry business model that is hidden in SB 1316, beyond the exorbitant 180% to 204% annual percentage rates (APR) that has been discussed extensively but is not directly mentioned in the Bill? There’s at least one other issue.

That issue is the nature of the minimal initial principle payment on the loan and the impact it has on the resulting interest accumulation over the 24 monthly payments allowed by the legislation.

For example, on an unsecured $2500 loan, at 17% per month interest (204% APR) as allowed by SB1316, the first monthly interest payment will be $425 and the first monthly principle payment will be $10.05. That $10.05 initial principle payment, when added to the first month’s interest payment ($425) becomes the total monthly loan payment ($435.05) that remains constant over the term of the loan.

That minimal initial principle payment ($10.05) is automatically determined in the loan amortization process such that increasing it incrementally each month by the amount that the interest payment decreases (to keep the loan payments constant) cumulatively adds up to the amount of the original loan ($2500 in this case) with the last loan payment.

But due to the predatory nature of this business model where monthly payments remain at $435.05 through all 24 payments, even with the monthly interest payments decreasing each month (because of the monthly principle payments), the interest on the loan will accumulate to $7,941.15 over the 24 month term of the loan. That’s over three times the amount of the $2500 loan. See Page 2 of the attached.

While the small initial monthly principle payment beginning at $10.05 benefits the borrower by keeping the monthly payments to a minimum, it’s that huge cumulative $7941.15 interest payment that is the insidious nature of the predatory lending industry business model.

And it’s a similar situation with a $500 unsecured loan over 24 months. The initial monthly principle payment would only be $2.01 (one fifth of what is required on a $2500 loan). But that results in about $1,600 in interest payments over the 24 month term of the $500 loan. That, like on a $2500 loan, is over 3 times the amount of the loan.

And here is why the lenders business model would not encourage starting off with a higher principle payment. For example, if the initial principle payment were increased to $20.05 on a $2500 loan, instead of $10.05, the total interest over 24 months would decrease by about $1600. And on a $500 loan if the initial principle payment were to be $10.01,instead of the normal $2.01, the loan would be paid off in 15 months. And the total interest payment over that time period would only be about $860. That’s only about one half of what it would be if the loan started with a $2.01 initial principle payment and was paid off over 24 months. Similar scenarios result for any loan amount when the initially required monthly principle payments are increased.

So with that lending industry business model we won’t see them encouraging beginning with a higher initial principle payment or early payoff of the loan balance. That’s because it would reduce the total amount of interest to be paid over the 24 month or shorter period of the loan. So it is definitely in the interest of the lender to have the payments extended over 24 months as allowed by the Bill, starting off with the resulting relatively small monthly principle payments that, of course, is intended to appear to be in the interest of the borrower. But it is primarily to the benefit of the lender, as part of their business model, to see the minimal initial principle payment and the payback extended over 24 months as allowed by the Bill. So I believe, with this business model, you can be assured that the lender will not be encouraging a larger initial principle payment or early pay off of the loan or offering lower percent per month interest rates. And while it would be nice to bring new industry to Arizona, as some of your leadership are advocating as a major reason to support SB 1316, we don’t need this kind of predatory lending business in Arizona.

Please join me and other concerned Arizona citizens and probably most of your constituents in opposing SB1316.