Activists Fear Arizona Will Let Companies Prey in a 'Regulatory Sandbox'

State Representative Jeff Weninger envisions making Arizona the first state in the country to create a "regulatory sandbox" where companies can test out innovative financial products and services without getting a license first.

But will those companies just end up coming up with new and innovative ways to repossess your car?

House Bill 2434, which the Chandler Republican introduced, would let Arizona-based companies operate for two years without a license or direct oversight from the Department of Financial Institutions.

That worries community advocacy groups like the Southwest Center for Economic Integrity, Arizona Community Action Association, Children's Action Alliance, and Protecting Arizona's Family Coalition, all of which oppose the bill and worry that it will lead to the expansion of predatory lending.

"We're certainly not opposed to innovation," Cynthia Zwick, the executive director of the Arizona Community Action Association, emphasized. "But let's ensure that consumer protections are in place while this gets off the ground."

Currently, the main concern for community advocates is that sales finance companies — mostly notably auto title lenders — would be able to participate in the sandbox. Since Arizona outlawed payday lending in 2010, auto title loans, which allow you to put up your car's title in exchange for some quick cash, have proliferated.

Arizona now has the seventh most concentrated auto title loan market in the country, with one outlet for every 8,072 people. Most of those are located in low-income communities, and charge exorbitant interest rates.

The fear is that those companies could effectively use the regulatory sandbox to develop new and innovative ways of ripping off poor people. Weninger considers it to be a straw man argument.

"The intent was to allow companies and startups who don't have access to capital to not have a ceiling, and a feeling that elites are the only ones who can start a fintech company," he said during a Committee of the Whole meeting last week. "Everyone’s boiled it down to one little title thing to reshape the narrative."

When questioned by state representative Athena Salman, a Democrat from Tempe, Weninger said that he anticipated that loans would only make up a small portion of the financial products that get tested out in the sandbox.

"This is something where someone is going to do a proof of concept to deploy in a wider market," he said. "People aren’t going to use this as an ongoing product."

But Weninger was also unwilling to modify the bill to exclude title loans.

"Would you be open to fixing that minor part so that we can make sure that room is made for the true innovators in our community?" Salman asked.

"This is going to be the last question that I answer, because I feel like we’re on a merry-go-round," Weninger huffily responded. "I like the bill as is."

He also added, somewhat defensively, "I think auto title lending is something necessary for people in my district, people in your district. Some people in every facet of society don't use that mechanism correctly. There's people in my district, I’m sure, who go to the casino too much."

Currently, regulatory sandboxes are already in place in several other countries, including Australia and Canada. The United Kingdom has the largest and most fully developed program, which has been in place since 2016.

The difference, according to the National Consumer Law Center, is that England's regulatory sandbox has a lot more oversight. (You could even say that it has more regulations.)  Participating companies work with a government-sponsored advisor, who make sure that safeguards get put in place and that experts have the chance to weigh in.

"In contrast to these carefully constrained and monitored programs, the Arizona proposal exempts companies broadly from licensing requirements with no specific additional requirements and little oversight," Lauren Saunders of the National Consumer Law Center wrote in a scathing letter.

Since the Arizona attorney general's office would oversee the program, Weninger pointed out that it's highly unlikely that scammers would try to use the sandbox to pull off some kind of fraud. After all, they'd only be opening themselves up to scrutiny by applying for the program in the first place.

"It would defy logic for anyone to be doing anything not in line with the law," he said.

But State Representative Pamela Powers Hannley, a Tucson Democrat, pointed out that the interest-only home loans that played a major role in the 2008 financial crisis were totally legal.

"I don't think the consumers will be protected," she said about the bill. "We will be experimented on by the financial industry."

The bill passed the House of Representatives on a party-line vote, and is now headed to the Senate.

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