One of the bills enacted in the recent legislative session was aimed at stopping one sort of money lender from counting fees separate from interest, but another bill that's awaiting action by the governor would formalize the practice for pawnshops.
The juxtaposition has advocates who oppose high-cost lending scratching their heads and asking Gov. Asa Hutchinson to veto House Bill 2164 by Rep. Dwight Tosh, R-Jonesboro. HB2164 includes the provisions on fees in pawn transactions.
However, Hutchinson negotiated with the pawn industry to develop the bill, a spokesman for the governor confirmed. And Tim Collier, president of the Arkansas Pawnbrokers Association, said that when an item is "pawned," the money involved is not a loan. The customer can walk away with the money, never intending to return for items -- used as collateral -- that are left at the pawnshop.
That distinction of a pawn versus a loan -- along with the argument that pawnshop fees do not count as interest -- matters because Arkansas voters approved a 17 percent cap on annual interest rates in 2010.
The Arkansas Supreme Court has ruled that loan fees count as interest, including in a 2008 case that then-Attorney General Dustin McDaniel used to kick payday lenders out of Arkansas. Those fees are at issue in Senate Bill 658 -- now Act 944 -- by Sen. Jason Rapert, R-Bigelow, which applies to credit service organizations like CashMax, which has branches in North Little Rock and Hope.
The state branch of the AARP and Hank Klein, the former head of the group Arkansans Against Abusive Payday Lending, argue that HB2164 seeks to put a practice into law that's illegal under the constitution.
"We feel this bill will cause the state to unnecessarily spend time and money to either defend or challenge HB2164 should it become law," Herb Sanderson, Arkansas state director for AARP, wrote in a letter to the governor. He is asking for a veto.
Klein said the bill aims to authorize a monthly 25 percent service charge -- by itself equal to a 300 percent annual percentage rate.
He said the pawn transactions are loans -- they've been calculated under federal Truth in Lending Act guidelines for about 20 years. Those calculations specify that fees are included in interest payments.
HB2164 -- supported by the Arkansas Pawnbrokers Association -- would create a commission appointed by the governor to regulate licensing, prohibited acts, pawnbroker liens and other issues.
It also would require the commission to issue rules on charging fees for "pawn transactions" on top of interest rates.
The word "loan" does not appear in the bill.
Tosh, the bill's sponsor, referred questions to the Pawnbrokers Association.
"It's not a loan, it's a pawn. And if it's not a loan, then the fees are not interest," said Collier of the Pawnbrokers Association. "A pawn transaction -- by definition -- is when a person turns over a piece of tangible personal property and 'pawns' that property. And then it's up to that person if they choose to come back and pick up their pawned item or not."
Collier said that unlike loans, there's no additional recourse by a pawnshop when a customer doesn't pay back what he owes.
However, the store keeps and sells the collateral.
"You can't have a loan if there's no obligation to pay back and so therefore the whole argument that the fees are interest is absurd because we have no idea of knowing when a pawn customer walks through the front door whether they're coming back or not.
"So we've got to be able to ascertain a real value of what that merchandise is worth so we know we can get our money back out of it if they don't come back because that's our only recourse. We don't affect credit. We don't check credit on the front end, report credit history on the back end. It's a nonrecourse transaction. That's what differentiates it from any other animal."
While AARP and Klein oppose HB2164, they're celebrating the passage of SB658 by Rapert.
The latter bill is now Act 944.
Seven years after the last payday lender closed its doors in the state, a new sort of business that facilitates small, short-term loans opened storefronts.
CashMax charges up to 280 percent interest on loans, as calculated by the company under the federal Truth in Lending Act guidelines.
The company says it complies with Arkansas law because fees -- which count as interest under the federal law -- don't count as interest under state law.
Act 944 aims to put a stop to that practice.
"We are still in the process of evaluating the legislation as well as next steps," Rebecca Tennille, a CashMax spokesman, said Friday.
Metro on 04/09/2017