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 AND ADDING NEW SECTIONS TO ESTABLISH COMPREHENSIVE CONSUMER LENDING PROTECTIONS AND PREVENT REGULATORY EVASION.

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.

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.

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. 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.

6-714. 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;

3. Database reporting requirements;

4. Procedures for identifying disguised credit transactions and true lenders;

5. Forms and procedures for the Emergency Credit Access Program.

Section 3. Repealer

Title 6, chapter 7, articles 1 through 5 (sections 6-601 through 6-649) are repealed.

Section 4. Conforming Amendment

Section 44-1522, Arizona Revised Statutes, is amended to include violations of Title 6, Chapter 7, Article 6 as unlawful practices under the Consumer Fraud Act.

Section 5. 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 6. Effective Date

This act is effective from and after January 1, 20XX, except that the department may immediately commence rulemaking and establish the required database.