Arizona Borrowers’ Bill of Rights
ARIZONA BORROWERS' BILL OF RIGHTS
AN ACT
AMENDING TITLE 6, ARIZONA REVISED STATUTES, BY REPEALING SECTIONS 6-601 THROUGH 6-649; ADDING NEW SECTIONS TO ESTABLISH COMPREHENSIVE CONSUMER LENDING PROTECTIONS AND PREVENT REGULATORY EVASION; AND CREATING A FRAMEWORK FOR PRODUCTIVE ASSET-BUILDING CREDIT TO SHIFT CAPITAL FROM EXTRACTIVE CONSUMPTION TO WEALTH-CREATING ENTERPRISE.
Be it enacted by the Legislature of the State of Arizona:
Section 1. Legislative Findings and Intent
The legislature finds and declares that:
1. Predatory lending and credit practices that extract wealth from Arizona consumers through excessive costs undermine family financial stability, community economic health, and the general welfare.
2. Existing consumer credit laws contain exemptions and loopholes that allow for effective annual percentage rates exceeding two hundred percent through devices such as rent-to-own agreements, title pawn transactions, and other disguised credit arrangements.
3. It is the policy of the State of Arizona to ensure that all consumer credit is extended on fair, transparent, and non-predatory terms, regardless of the form or name given to the transaction.
4. The economic substance of a transaction, not its legal form, must determine its regulatory treatment to prevent evasion of consumer protections.
5. Consumer credit scores are proprietary algorithms created, owned, and calibrated by the commercial credit reporting industry. Their primary design function is to predict the statistical likelihood of future profitability to a lender, based on a consumer's past use of credit. They are not calibrated to measure, and do not constitute a reliable measure of, a person's moral character, personal responsibility, propensity for risky behavior, quality of workmanship, or general good faith.
6. The use of a profitability-to-lenders score for determinations unrelated to credit repayment—such as employment fitness, tenancy suitability, or insurance risk—is an irrelevant and unreliable practice that unfairly disadvantages consumers. When such use disproportionately affects classes of persons protected by civil rights laws, it creates a substantial risk of unlawful disparate impact discrimination.
7. The extension of credit inherently carries a risk of non-payment. A lender's underwriting model must reflect real economic circumstances to responsibly mitigate this risk. Simplistic metrics, such as a debt-to-income ratio, are insufficient to assess true creditworthiness, as they fail to account for critical variables such as localized cost of living, family size and obligations, and essential household expenditures. More sophisticated and individualized assessments of a consumer's residual income are necessary to reliably determine the ability to repay without undue hardship.
8. The failure of credit underwriting to account for these real-world financial realities results in excessive debt burdens that increase consumer default, reduce economic mobility, and contribute to increased reliance on public social welfare systems. Therefore, sound public policy requires that underwriting standards, interest rates, and the extension of credit itself be calibrated to reflect a comprehensive and realistic assessment of a consumer's financial capacity.
9. A healthy economy requires credit to flow toward wealth creation, not wealth extraction. The State of Arizona must actively channel credit toward productive purposes—including small business formation, skills acquisition, and the purchase of appreciating assets—while eliminating extractive lending for consumptive purposes that depreciate in value.
10. The ultimate goal of consumer credit regulation is to promote household financial stability, not merely to enforce repayment. A credit system that, through its enforcement mechanisms, pushes borrowers or their dependents into indigence or forces reliance on public assistance to service private debt fails its essential purpose and shifts costs from private lenders to the public treasury. It is therefore the policy of this state that all actions to collect, enforce, or restructure debts should be undertaken with the paramount goal of preserving the borrower's ability to meet basic living expenses and maintain self-sufficiency.
11. Therefore, to ensure that consumer credit information is used only for its relevant purpose, to promote underwriting that reflects true financial capacity, to create pathways for productive asset-building, and to prevent both unfair consumer outcomes and the risk of discrimination, it is the policy of this state to strictly limit the use of credit reports and scores, to mandate responsible underwriting practices by entities it licenses to extend consumer credit, and to create innovative financing mechanisms for wealth-creating activities.
Section 2. Title 6, Arizona Revised Statutes, is amended by adding a new chapter, to be designated as Chapter 7, Article 6, to read:
ARTICLE 6. FAIR CONSUMER CREDIT TRANSACTIONS
6-701. Definitions
In this article, unless the context otherwise requires:
1. "Annual percentage rate" or "APR" means the cost of credit expressed as a yearly rate, calculated according to the federal Truth in Lending Act, 15 United States Code section 1601 et seq., and Regulation Z, 12 Code of Federal Regulations part 1026, and including all costs imposed on the consumer as a condition of the credit, including but not limited to interest, fees, insurance premiums, membership charges, administrative fees, and any other finance charge.
2. "Consumer" means a natural person who is a resident of this state and who receives credit or purchases property or services through a credit sale.
3. "Credit sale" means any transaction, regardless of its form or the terminology used by the parties, in which:
a. Credit is extended to a consumer, OR
b. Property is sold, leased, rented, or services are provided to a consumer, and:
i. The seller, lessor, or provider retains an interest in the property, OR
ii. The consumer's payments over the term of the agreement substantially equal or exceed the fair market value of the property or services at the time of the agreement, OR
iii. The consumer has an option or obligation to become the owner of the property for nominal or no additional consideration upon completion of payments.
4. "Department" means the department of financial institutions.
5. "Disguised credit transaction" means any transaction structured with the purpose of evading the requirements of this article that has the economic substance of extending credit to a consumer.
6. "Lender" means any person or entity that offers, makes, or holds a consumer loan or is the true lender in a credit sale or disguised credit transaction.
7. "Predominant economic interest" means the right to receive more than fifty percent of the expected financial benefit from a transaction after accounting for all payments to agents, service providers, or intermediaries.
8. "True lender" means the person or entity that holds the predominant economic interest in a loan, credit sale, or disguised credit transaction. In determining the true lender, the department shall consider, without limitation:
a. Which entity holds the right to receive payments from the consumer;
b. Which entity bears the economic risk of non-payment;
c. Which entity designs, sets, or controls the material terms of the transaction;
d. Which entity markets, solicits, or arranges the transaction with consumers;
e. Whether an intermediary serves merely as a conduit for another entity that provides the funds and receives the economic benefit.
6-702. Scope of Application
A. This article applies to:
1. All consumer loans of twenty-five thousand dollars or less made to Arizona residents;
2. All credit sales as defined in section 6-701 made to Arizona residents;
3. All disguised credit transactions involving Arizona residents;
4. All transactions where a person advances funds to or on behalf of a consumer and is repaid from the consumer's future income or assets, regardless of how characterized;
5. All transactions subject to paragraphs 1 through 4 where the true lender markets to, solicits, arranges, or extends credit to Arizona residents, or holds the predominant economic interest in the transaction.
B. This article applies regardless of:
1. The lender's state of incorporation, charter, or physical location;
2. Whether the transaction is conducted in person, online, by mail, or by telephone;
3. The terminology used to describe the transaction, including "lease," "rental," "lease-purchase," "rent-to-own," "sale-leaseback," "title pawn," "earned wage access," "income advance," "merchant cash advance," or any other designation.
6-703. Maximum Annual Percentage Rate
A. Notwithstanding any other law, no lender shall make, arrange, or hold a consumer loan, credit sale, or disguised credit transaction with an annual percentage rate that exceeds twenty-four percent.
B. The annual percentage rate calculation shall include ALL costs imposed on the consumer, including but not limited to:
1. Interest charges;
2. All fees of any kind;
3. Credit insurance, debt cancellation, or debt suspension premiums;
4. Membership, subscription, or club fees;
5. Delivery, installation, or set-up charges that would not be charged for a cash transaction;
6. Any other charge that would not be imposed but for the extension of credit.
C. For rent-to-own, lease-purchase, and similar transactions, the APR shall be calculated by comparing:
1. The total of all payments the consumer will make to acquire ownership; to
2. The cash price the merchant would charge for an immediate cash sale of the same property.
6-704. Required Terms and Structure
A. All transactions subject to this article must be structured as installment agreements with substantially equal periodic payments that fully amortize the obligation over its term.
B. No transaction may contain a balloon payment, defined as a final payment that is more than twice the amount of a regular periodic payment.
C. For transactions of two thousand five hundred dollars or less, the minimum term shall be four months.
D. No lender may refinance, renew, or extend a transaction with the same consumer until at least fifty percent of the original principal or cash price has been repaid.
E. All payments received shall be applied in the following order:
1. Accrued interest or finance charges;
2. Principal or cash price;
3. Fees and charges.
F. Loan Term Limitations for Asset-Backed Purchases.
1. For any credit sale or loan where a primary purpose is the purchase of a specific, identifiable tangible asset (such as a vehicle, appliance, or electronic device) and where that asset secures the obligation, the term of the credit shall not exceed the Primary Warranty Period of that asset.
2. "Primary Warranty Period" means the longest duration, from the date of first retail purchase, of any original manufacturer's warranty that covers the repair or replacement of a Major Functional Component. A "Major Functional Component" is a system or part whose failure would render the asset inoperable or unfit for its primary intended use (e.g., an engine, transmission, refrigeration system, central processing unit).
3. In the absence of a verifiable manufacturer's warranty meeting the definition in paragraph 2, the Primary Warranty Period shall be presumed to be:
a. For motor vehicles: 5 years or 60,000 miles, whichever is longer.
b. For major appliances (refrigerators, washers, dryers, ovens): 3 years.
c. For consumer electronics over $500: 2 years.
d. For all other tangible assets: A period determined by the department based on standard industry reliability data.
4. The lender must disclose the Primary Warranty Period used to determine the maximum permissible loan term in the contract. The lender bears the burden of proving the validity of any manufacturer's warranty period it cites.
5. This subsection does not apply to real estate mortgages or loans secured by a primary residence.
6-705. Ability to Repay Requirement
A. Before extending credit, a lender must make a reasonable, good faith determination that the consumer has the ability to repay according to the transaction's terms.
B. This determination must consider the consumer's:
1. Current and reasonably expected income;
2. Current obligations;
3. Employment status;
4. Credit history;
5. Other financial resources.
C. A lender may not extend credit if the consumer's total monthly debt payments, including the proposed payment, would exceed fifty percent of the consumer's verified gross monthly income.
6-706. Right of Rescission and Extended Payment Plan
A. A consumer has an unconditional right to rescind any transaction subject to this article within seventy-two hours by returning the property or principal amount in full. No fee or charge may be imposed for such rescission.
B. If a consumer notifies a lender of an inability to make a scheduled payment, the consumer has a once-per-year right to an extended payment plan of at least ninety days with no additional fees or charges beyond the original terms.
6-707. Prohibited Practices
No lender may, in connection with any transaction subject to this article:
1. Take a security interest in household goods, except for a purchase money security interest in the specific property being financed;
2. Require a consumer to purchase insurance or any other product as a condition of the transaction;
3. Include a mandatory arbitration clause or waiver of any legal right or remedy;
4. Threaten or initiate criminal proceedings for non-payment;
5. Use a device or agreement that would have the effect of evading this article, including but not limited to:
a. Splitting a single transaction among multiple lenders;
b. Using an intermediary with no meaningful economic risk;
c. Characterizing interest or finance charges as "rent," "fees," or other non-credit terms.
6-708. Enforcement and Penalties
A. Any violation of this article constitutes an unlawful practice under section 44-1522.
B. A consumer injured by a violation may bring a civil action and recover:
1. Actual damages;
2. Statutory damages equal to three times the total amount of all payments made or to be made under the transaction;
3. Reasonable attorney's fees and costs;
4. Equitable relief, including rescission of the transaction.
C. A lender who willfully violates section 6-703 is guilty of a class 6 felony.
D. The department shall examine lenders for compliance and may:
1. Impose an administrative penalty of up to twenty-five thousand dollars per violation;
2. Suspend a license for a first violation;
3. Revoke a license permanently for a second violation;
4. Issue cease and desist orders against unlicensed activity.
6-709. Statewide Credit Transaction Database
A. The department shall establish and maintain a statewide database tracking all transactions subject to this article.
B. Before extending credit, a lender must check the database to ensure compliance with sections 6-704 and 6-705.
C. Lenders must report all transactions to the database within one business day.
6-710. Substance Over Form; Anti-Evasion
A. The economic substance of a transaction, not its formal designation, shall govern its classification under this article.
B. The department is authorized to investigate any transaction and determine whether it constitutes a disguised credit transaction subject to this article.
C. In making such determination, the department shall consider, without limitation:
1. Whether the total payments substantially exceed the fair market value of property or services;
2. Whether the consumer bears most of the risk of loss or depreciation;
3. Whether the transaction functions as a secured loan in economic substance;
4. Whether the provider's profit derives primarily from the time value of money rather than the provision of property or services.
D. The department may issue "true lender" determinations and require compliance by the entity it identifies as the true lender.
6-711. Rulemaking for Evolving Products
A. The department shall have ongoing authority to issue interpretive rules and advisory opinions determining whether new financial products or services are subject to this article.
B. The department shall maintain a public registry of such determinations, which shall have the force of law after a thirty-day public comment period.
C. The department shall proactively monitor the market for new products designed to evade this article and issue determinations within sixty days of identifying a potentially evasive product.
6-712. Emergency Credit Access Program
A. The department shall establish the Arizona Emergency Credit Access Program to facilitate responsible small-dollar credit.
B. The program shall provide grants and low-interest capital to participating non-profit credit unions and community development financial institutions to offer emergency loans of two thousand five hundred dollars or less at an APR not to exceed eighteen percent.
C. Employers who establish no-interest emergency advance programs for employees may deduct one hundred fifty percent of the amounts advanced from their state corporate income tax liability.
6-713. Limitation on Use of Consumer Credit Information
A. Permissible Use for Licensed Lenders. For any transaction subject to this article, a lender licensed or required to be licensed under Arizona law may obtain or use a consumer report, as defined in the federal Fair Credit Reporting Act (15 U.S.C. § 1681a), only for the purpose of making a reasonable, good faith determination of the consumer's ability to repay the specific credit being offered, as required by Section 6-705.
B. Prohibited Uses by Licensed Lenders. In connection with a transaction subject to this article, a lender is prohibited from:
1. Using a consumer report or credit score to deny credit, or to vary the terms of credit offered, based on information that is not directly predictive of credit risk for the specific obligation, including but not limited to medical information or the number of credit inquiries.
2. Using a consumer report or credit score for any purpose unrelated to the underwriting or servicing of the credit being extended, including but not limited to:
a. Marketing or pre-screening for non-credit products or services.
b. Making any assessment, inference, or assumption regarding the consumer's character, general reliability, or morality.
3. Conditioning the extension of credit on the consumer's consent to obtain a consumer report for any purpose not expressly authorized by subsection A of this section.
C. Special Rule for Certain Credit Sales. For rent-to-own, lease-purchase, and similar transactions qualifying as credit sales under this article, a merchant may consider only the consumer's payment history with that specific merchant, or substantiated instances of fraud or theft related to the property at issue. A general consumer credit report or score may not be obtained or used to qualify the consumer.
D. Construction with Other Laws.
1. This section governs the conduct of lenders and credit sellers licensed under this Title. It is not intended to, and does not, regulate employers, landlords, or insurers in their separate capacities, except to the extent such an entity is acting as a "lender" as defined in Section 6-701.
2. Nothing in this section shall be construed to limit any right or remedy available under federal or state anti-discrimination laws, including those prohibiting disparate impact discrimination. Compliance with this section is a relevant factor in demonstrating a lender's good-faith efforts to avoid unlawful discrimination.
E. Rulemaking. The department shall adopt rules to further define the specific components of a consumer report that are directly predictive of credit risk for purposes of subsection B.1.
6-714. Systemic Resilience and Borrower Continuity Plans
A. Legislative Purpose. The legislature finds that widespread consumer default due to economic shocks, public health emergencies, or natural disasters harms borrowers, threatens the solvency of lending institutions, and places unsustainable strain on public social welfare systems and courts. To promote financial stability and protect the public welfare, lenders must prepare to provide immediate, systematic relief to borrowers in distress during declared emergencies, thereby reducing cascading defaults, bankruptcies, and institutional failures.
B. Definitions. In this section:
1. "Covered Emergency" means an event declared as a state of emergency by the Governor of Arizona or the President of the United States that has a substantial, demonstrable negative impact on the employment or income of a significant number of Arizona residents.
2. "Systemic Shock" means a rapid, severe economic downturn or market disruption affecting Arizona, as formally identified by the department through an expedited rulemaking process.
3. "Borrower Continuity Plan" or "Plan" means the plan required under subsection C.
C. Plan Requirement and Approval.
1. Mandatory Filing. Any lender with an outstanding portfolio of more than one thousand (1,000) loans subject to this article, or with a total portfolio principal exceeding ten million dollars ($10,000,000), must develop, maintain, and file a Borrower Continuity Plan with the department. The department may require plans from smaller lenders if it deems their failure would pose a risk to local market stability.
2. Plan Components. The Plan must be pre-approved by the department and shall include, at a minimum:
a. Automatic Forbearance Protocol: A system to automatically identify borrowers residing in a geographic area affected by a Covered Emergency or working in an industry formally recognized as distressed.
b. Standardized Relief Options: Pre-defined, uniform relief offerings for eligible borrowers, which must include, at the borrower's election:
i. A payment deferral of at least ninety (90) days, with no accrual of additional interest or fees during the deferral period on the deferred amount.
ii. An instalment reduction plan that reduces the borrower's monthly payment by at least fifty percent (50%) for a period of at least six (6) months, with the term extended accordingly.
iii. A no-penalty early closure option allowing the borrower to satisfy the loan by paying only the remaining principal balance, with all future interest and charges waived.
c. Communication and Activation Protocol: A detailed plan for notifying eligible borrowers of available relief within seven (7) days of a Covered Emergency declaration, including clear instructions for opting in.
d. Capital and Liquidity Assurance: A demonstration, through pro forma financial modeling acceptable to the department, that the lender maintains sufficient capital and liquidity reserves, or has pre-arranged contingent financing, to implement its Plan without threatening its safety and soundness.
e. Reporting and Accountability: A commitment to report to the department weekly during Plan activation, detailing the number of borrowers receiving relief, types of relief granted, and impact on the lender's portfolio.
D. Proactive Portfolio Review and Modification.
1. Targeted Review. In anticipation of or during a Systemic Shock, the department may direct lenders to review portfolios to identify borrowers whose total debt-to-income ratio, when using the localized cost-of-living standards established under rule, exceeds fifty-five percent (55%).
2. Mandatory Modification. For borrowers identified under paragraph 1, the lender must proactively offer a permanent loan modification. Such modification must achieve a projected post-modification debt-to-income ratio of no more than forty-five percent (45%) and may include: a reduction of the interest rate to a floor of twelve percent (12%) APR, an extension of the loan term, or a permanent principal forbearance of up to twenty percent (20%) of the outstanding balance.
E. Funding Mechanism - Arizona Consumer Credit Stability Fund.
1. Establishment. The Arizona Consumer Credit Stability Fund is established as a dedicated, non-lapsing fund administered by the department. The fund consists of fees collected under paragraph 2, investment earnings, and legislative appropriations.
2. Stability Assessment.
a. The department shall levy an annual assessment on each lender required to file a Plan under subsection C.1. The assessment shall be:
i. A base fee of two thousand five hundred dollars ($2,500); and
ii. A variable fee of 0.02% of the lender's total outstanding principal of loans subject to this article made to Arizona residents.
b. Assessment proceeds shall be deposited in the Arizona Consumer Credit Stability Fund.
3. Use of Funds. The fund shall be used exclusively for the following purposes:
a. To provide reinsurance payments to lenders implementing approved Plans during a Covered Emergency, covering up to twenty percent (20%) of the deferred interest revenue lost during the relief period, provided the lender is in full compliance with its Plan and this article.
b. To fund the Emergency Credit Access Program established under Section 6-712.
c. To fund financial counseling and borrower education programs administered by non-profit organizations approved by the department.
F. Enforcement.
1. Failure to file an approvable Borrower Continuity Plan, or failure to activate a Plan in good faith during a Covered Emergency, shall constitute an unsafe and unsound practice and a violation of this article.
2. The department may suspend the license of a lender in violation of this section and appoint a third-party administrator to implement the lender's Plan or a standard Plan for the lender's portfolio at the lender's expense.
3. The department may draw upon the Arizona Consumer Credit Stability Fund to provide direct relief to borrowers of a lender that becomes insolvent during a Covered Emergency.
6-715. Fair Return Benchmark and Lender Justification Requirement
A. Legislative Finding on a Fair Return Benchmark. The legislature establishes that, based on analysis of operational costs, sustainable loss rates, and reasonable profit margins in an efficiently managed consumer credit program, a total cost of credit not exceeding ten percent (10%) of the principal amount advanced represents a Fair Return Benchmark for the provision of responsible consumer credit under this article.
B. Mandatory Disclosure and Justification.
1. For Any Loan Exceeding the Benchmark: Any lender offering a loan, credit sale, or disguised credit transaction where the total cost of credit to the consumer would exceed the 10% Fair Return Benchmark must, in the contract and in a separate, stand-alone disclosure document provided to the consumer at least 72 hours before signing:
a. State Prominently: "The total cost of this credit exceeds the Arizona Fair Return Benchmark of 10% of the principal."
b. Provide Itemized Justification: Provide a detailed, itemized explanation, in plain language, of the specific reasons the cost exceeds the Benchmark, selecting from the following categories and providing supporting data:
i. High Operational Costs: "Our cost to process and service this type of small loan is $X, which constitutes Y% of your principal." (Must be compared to industry median from the Department's database).
ii. High Projected Loss Rate: "Based on our lending history, we project that Z% of loans in this category will not be repaid." (Must be backed by the lender's own loss data reported to the Statewide Database).
iii. Risk Premium for Borrower-Specific Factors: "Our assessment of your application indicated the following elevated risk factors: [e.g., 'volatile income history,' 'no prior credit history,' 'high localized cost-of-living burden']. The added cost is $W to account for this elevated risk."
iv. Return on Capital: "Our shareholders require a return of R% to provide the capital for this loan."
2. Consumer Acknowledgment: The consumer must sign a separate acknowledgment stating: "I have received and read the justification for why the cost of this loan exceeds the Arizona Fair Return Benchmark. I understand I have the right to seek credit from other sources, including the Arizona Emergency Credit Access Program."
3. Department Submission & Public Database: All Justification Disclosures must be submitted to the Department within 5 business days. The Department shall maintain a public, searchable online database listing each lender and, for every loan made above the Benchmark: the justification category used, the dollar amount of the excess cost, and the anonymized risk factors cited. This database will be sortable by lender.
C. Enhanced Liability for Unjustified Loans.
1. Any loan made above the 10% Fair Return Benchmark where the lender has failed to provide the required Justification Disclosure is voidable at the consumer's option, and the lender may only recover the principal amount advanced.
2. For any loan made above the Benchmark, if a consumer later demonstrates in a civil action that the lender's stated justification was materially false or misleading (e.g., their operational costs were falsely inflated, their loss rates were misstated), the consumer is entitled to treble damages on all amounts paid over the principal, plus attorney's fees.
3. A pattern of filing materially false justifications with the Department shall constitute license revocation grounds under Section 6-708.
D. Safe Harbor for Loans at or Below Benchmark. Loans priced at or below the 10% Fair Return Benchmark are exempt from the disclosure requirements of this section and are entitled to a rebuttable presumption of being fair, non-predatory, and in compliance with the spirit of this article.
6-716. Standards for Collections, Judgments, and Debt Adjustment
A. Legislative Principle. It is the policy of this state that the enforcement of obligations arising under this article shall not render a consumer or the consumer's dependents indigent or dependent on public assistance programs to meet basic needs. The department, courts, and all lenders shall consider the preservation of the consumer's capacity for self-sufficiency as a paramount factor in any collection, settlement, or judicial proceeding related to such debt.
B. Limitation on Wage Garnishment and Asset Levies. Notwithstanding any other provision of law, for judgments arising from transactions under this article:
1. A lender seeking garnishment must file an affidavit demonstrating that the proposed garnishment, after accounting for the consumer's verified essential monthly living costs (as defined by the department using localized cost-of-living metrics), will not reduce the consumer's remaining disposable income below 150% of the federal poverty guideline for the consumer's household size.
2. No execution may be levied upon a primary vehicle used for employment, essential medical transportation, or childcare, nor upon essential household goods as defined in Section 6-707(1).
C. Mandatory Financial Hardship Review.
1. If a consumer asserts an inability to pay a judgment or collection demand under this article, the lender or its collector must suspend collection activity and engage in a Financial Hardship Review.
2. This review must use the same sophisticated analysis of residual income, localized costs, and family obligations required for underwriting in Section 6-705.
3. Based on this review, the lender must offer a sustainable repayment plan that does not require payments that would reduce the consumer's household income below the essential needs threshold established by the department. The terms of any such plan accepted by the consumer may be entered as a court order modifying the original judgment.
D. Prohibition on Shifting Burdens to Public Assistance.
1. No settlement, stipulated judgment, or repayment plan for debt under this article may require a payment amount that, based on the consumer's verified financial circumstances, would make the consumer or their dependents eligible for, or increase their reliance on, means-tested public assistance programs (including but not limited to SNAP, TANF, Medicaid, or Section 8 housing) where such eligibility or increased reliance was not present prior to the imposition of the payment.
2. A consumer may raise a violation of this subsection as an affirmative defense in any collection action, and the court shall have the authority to modify the repayment terms accordingly.
E. Relation to Federal Bankruptcy. This section establishes the public policy of Arizona regarding the collection of debts governed by this article. Nothing in this section shall be construed to limit or alter rights or procedures under the United States Bankruptcy Code. However, any lender subject to this article shall provide notice to a consumer defendant of their rights under this section and their right to seek federal bankruptcy protection in any collection lawsuit filed in state court.
6-717. Relation to Federal Law
A. This article applies to all lenders extending credit to Arizona residents, except to the extent specifically preempted by federal law.
B. In the event of a conflict, the provisions that provide greater protection to the consumer shall control.
6-718. Rules
The department shall adopt rules necessary to implement this article, including rules establishing:
1. The calculation methodology for APRs in various transaction types;
2. Standards for verifying ability to repay, incorporating localized cost-of-living and family size;
3. Database reporting requirements;
4. Procedures for identifying disguised credit transactions and true lenders;
5. Forms and procedures for the Emergency Credit Access Program;
6. Standards as required under Section 6-713;
7. Detailed requirements, submission procedures, approval standards, and modeling criteria for Borrower Continuity Plans under Section 6-714;
8. The methodology for calculating and collecting the annual stability assessment under Section 6-714;
9. Standards and procedures for the Fair Return Benchmark justifications and public database under Section 6-715;
10. Standards for essential living costs, hardship reviews, and sustainable repayment plans under Section 6-716.
Section 3. Title 6, Arizona Revised Statutes, is amended by adding a new Article 7 to Chapter 7, to read:
ARTICLE 7. ARIZONA PRODUCTIVE CAPITAL AND ASSET-BUILDING FRAMEWORK
6-801. Legislative Intent for Productive Credit.
The legislature finds that a healthy economy requires credit to flow toward wealth creation, not wealth extraction. It is the intent of this article to create specific pathways, incentives, and protections to shift a significant portion of consumer and small business credit in Arizona toward:
1. The launch and growth of owner-operated small businesses and sole proprietorships;
2. The acquisition of education, training, and professional licensure that increases earning potential;
3. The purchase, repair, or improvement of assets that are likely to appreciate in value or generate income (e.g., owner-occupied housing, rental property, agricultural land, productive equipment);
4. The refinancing of high-cost consumption debt into lower-cost, amortizing loans tied to financial counseling;
5. The creation of financing structures where lender and borrower success are aligned, moving away from adversarial, high-interest debt that strangles small business cash flow.
6-802. Arizona Productive Asset Loan (APAL) Certification.
A. The department shall establish a certification for loans that meet "Productive Asset" criteria.
B. To be certified as an APAL, a loan must be for a pre-approved, enumerated purpose, including:
1. Micro-Enterprise Loan: ($2,000 - $75,000) For business startup or expansion costs, inventory, equipment, or working capital for a business with a registered Arizona transaction privilege tax (TPT) license and a business plan that has been reviewed by a Small Business Development Center or similar approved counselor.
2. Skills Investment Loan: ($1,000 - $25,000) For tuition, fees, books, tools, or living expenses related to an accredited vocational program, apprenticeship, or professional certification program in a high-demand field as defined by the Arizona Commerce Authority.
3. Asset Builder Loan: ($5,000 - $100,000) For the down payment, renovation, or energy-efficiency upgrade of an owner-occupied home; the purchase of a residential rental property (up to 4 units) by a first-time investor completing a landlord education course; or the purchase of income-generating equipment for a trade or business.
4. Productive Debt Refinancing Loan: ($1,000 - $40,000) To refinance existing high-cost consumer debt, provided the borrower enrolls in mandatory financial counseling and the new loan reduces total monthly debt service by at least 20%.
C. APALs are subject to a maximum APR of 12%.
D. Rationale: The legislature finds that loans for productive assets create their own collateral through cash flow and appreciation, and that the state's role in de-risking these loans (through certification, counseling, and matched savings) justifies a low, sustainable cost of capital that allows businesses and asset-builders to thrive without being crushed by debt service.
E. APALs receive preferential treatment:
1. Lenders offering a portfolio where more than 25% of their loan volume by dollar amount is in APALs receive a 75% reduction in their annual Stability Fund assessment under Section 6-714(E).
2. APALs are reported to a separate, public "Arizona Investment Track" database that highlights productive lending and entrepreneur success stories.
3. APALs are exempt from the loan term limitation in Section 6-704(F) if the asset's warranted operational lifetime exceeds the standard underwriting term for such loans.
6-803. Alternative Financing Structures for Higher-Risk Productive Ventures.
For loan purposes that may carry higher inherent risk but remain productive (e.g., innovative product development, certain restaurant concepts, artistic ventures), lenders may offer an APAL-Flex product using one of the following non-extractive, aligned-success structures, which are exempt from standard APR caps but subject to total cost limitations:
1. Revenue-Based Financing:
a. The borrower repays a fixed percentage of monthly gross revenue (capped between 5% and 10%) until a pre-determined total repayment cap is reached.
b. The total repayment cap shall not exceed 1.8 times the principal advanced for terms under 3 years, or 2.2 times the principal for terms of 3-5 years.
c. Payments automatically adjust with cash flow. If monthly revenue falls below a sustainable threshold (defined in the contract), payments may be paused or reduced without penalty.
d. This structure ensures the business is never forced into insolvency by a fixed payment during lean periods.
2. Convertible Debenture / Profit-Share Agreement:
a. The loan carries a minimal base interest rate (not to exceed 5% APR).
b. The lender receives an additional right to a small percentage of net profits (capped between 2% and 5%) for a fixed period (3-7 years), OR the option to convert a portion of the debt (not to exceed 20% of the principal) into a small equity stake (capped at 5% ownership) upon a qualifying liquidity event or after 5 years.
c. This aligns the lender's success directly with the long-term success of the venture.
3. Department-Approved Hybrid Models: The department may approve other innovative structures that prioritize repayment sustainability, cash flow alignment, and shared success over fixed high interest, provided they meet the principle of not creating debt service burdens that threaten enterprise viability.
6-804. Matched Savings "Step-Up" Program.
A. The department shall partner with approved non-profit community development financial institutions (CDFIs) and credit unions to administer a matched savings program for APALs.
B. A consumer who successfully completes a financial literacy and business planning course approved by the department and who saves a target amount in a designated account over 6-18 months shall have those savings matched 3:1 from the Arizona Consumer Credit Stability Fund, provided the total is used as a down payment or co-investment in an APAL.
C. The matched funds from the Stability Fund shall be structured as a zero-interest, forgivable subordinate loan. It is repaid only after the primary APAL is fully satisfied. If the business or asset is still operational and the borrower remains in good standing after 5 years, the subordinate loan is 100% forgiven.
D. This turns state support into true patient, risk-tolerant capital that directly reduces the borrower's debt burden and increases the likelihood of success.
6-805. Productive Credit Underwriting Standards.
A. Underwriting for an APAL must prioritize cash flow projection and asset performance over traditional consumer credit scores.
B. For any APAL, the lender must prepare and document a Debt Service Coverage Ratio (DSCR) projection. The projected net operating income (for assets) or net business profit (for enterprises) must be at least 1.5 times the proposed loan payment.
C. For a Micro-Enterprise Loan, the primary underwriting document is the business plan and pro forma cash flow statement. The consumer's personal credit history may not be the sole or primary reason for denial.
D. For an Asset Builder Loan, underwriting must include an estimate of the appreciation potential or income generation of the asset, prepared by a qualified third party or using accepted methodologies.
E. This underwriting discipline ensures loans are extended only when the underlying project can mathematically support the debt, preventing doomed ventures and protecting both borrower and lender.
6-806. "Fresh Start" Productive Debt Refinancing Program.
A. A lender may offer a consolidation and refinancing loan certified under Section 6-802(B)(4).
B. To qualify, the loan must:
1. Reduce the consumer's total monthly debt service by at least 20%;
2. Require the consumer to enroll in and complete a mandatory budget and business counseling program;
3. Automatically direct a portion of the monthly payment savings (at least 25%) into a restricted savings account that can only be used as a down payment for a future APAL or as emergency business capital.
C. This program directly converts the "waste" of consumption debt service into a seed for future productive investment, breaking the cycle of consumptive debt.
6-807. Tax Incentives for Productive Lending and Investment.
A. Individual Investor Incentive: An Arizona resident who invests directly in an APAL or APAL-Flex product through a department-approved platform may deduct up to $10,000 annually from their Arizona adjusted gross income for such investments. This mobilizes in-state capital, creating a virtuous cycle where Arizonans fund Arizona entrepreneurs.
B. Lender Incentive: A licensed lender that has more than 40% of its total Arizona loan portfolio (by dollar amount) in APALs and APAL-Flex products qualifies for a 50% reduction in its state corporate income tax rate. This transformative incentive is designed to shift lender business models fundamentally toward productive, wealth-building finance.
C. Borrower Incentive: Interest paid on an APAL is deductible from Arizona state income tax, similar to mortgage interest, for the first five years of the loan.
6-808. Technical Assistance and Mentorship Network.
A. The department shall establish a network of approved technical assistance providers, including retired executives, trade professionals, and business educators, to provide mentorship to APAL borrowers.
B. Lenders offering APALs must connect borrowers with this network, and a portion of the lender's tax incentive is contingent upon borrower utilization and satisfaction with mentorship services.
C. This wraparound support system dramatically increases the likelihood of business success and loan repayment.
6-809. Rules for Productive Capital Framework
The department shall adopt rules necessary to implement this article, including rules establishing:
1. Certification procedures and documentation requirements for APALs;
2. Standards and approval processes for APAL-Flex structures;
3. Administration of the Matched Savings "Step-Up" Program;
4. Standards for DSCR calculation and cash flow underwriting;
5. Procedures for the "Fresh Start" refinancing program;
6. Implementation of tax incentive verification and reporting;
7. Establishment and oversight of the Technical Assistance and Mentorship Network.
Section 4. Repealer
Title 6, chapter 7, articles 1 through 5 (sections 6-601 through 6-649) are repealed.
Section 5. Conforming Amendment
Section 44-1522, Arizona Revised Statutes, is amended to include violations of Title 6, Chapter 7, Articles 6 and 7 as unlawful practices under the Consumer Fraud Act.
Section 6. Severability
If any provision of this act or its application is held invalid, the invalidity does not affect other provisions or applications that can be given effect without the invalid provision.
Section 7. Effective Date
This act is effective from and after January 1, 2028, except that the department may immediately commence rulemaking and establish the required databases and programs.
