AG determines ‘sandbox’ law allows ‘income share’ firm to operate in Arizona
PHOENIX -- Attorney General Mark Brnovich has given the go-ahead for an Illinois firm to "lend'' up to $12,500 to Arizonans without state regulation -- and potentially at a higher cost than state law allows traditional consumer finance companies to charge.
And the reason, according to a key Brnovich aide, is that, technically speaking, the company is not making a loan. Instead, it's an "income sharing agreement, with the company "investing'' in someone's future earnings and hoping to get back more than they put in.
The company, Align Income Share Funding, provides cash to individuals based on a promise by borrowers to pay back a fixed percentage of their income for up to five years.
Adam Ginsburgh, the company's chief operating officer, said that link provides a significant advantage to consumers: If they're out of work through no fault of their own, the requirement to make payments stops. And he said that the borrower is freed from any obligations at the end of the period even if all the payments have not been made -- and even if the amount repaid is less than advanced.
But the company is in business to make money. And Ginsburgh said it uses underwriting standards to determine how many monthly payments are required.
And what it also means, he said, is there is no requirement to comply with federal "truth in lending'' regulations which require borrowers be given a sheet showing them the effective interest rate. He said, though, the borrowers do get sufficient information to allow them to compare what Align is offering with a more traditional -- and state-regulated -- consumer loan.
Brnovich was empowered to authorize exemptions from consumer lending laws a new state statute creating a "sandbox'' for companies to try out new or unusual financial programs in Arizona. Aide Ryan Anderson said what Align is doing meets the test.
"Allowing Align into the Sandbox is about giving a potentially new business model the chance to show that it's different under state law,'' he said. "We think they have a legitimate argument that it's not a consumer loan under state law.''
Anyway, Anderson said, it's very possible that Align could do what it wants in Arizona, providing money to Arizonans under payment terms, with -- or without -- Brnovich's permission.
"If it's not a consumer loan, they don't need a license, and there wouldn't be any government oversight,'' he said. "Here, we have a chance to see how this works in a controlled environment, how the company interacts with consumers, and ultimately whether their product proves out.''
And since it's not a loan, Anderson said, that cap of 36 percent annual interest rate in Arizona law does not apply.
Ginsburgh said there's nothing novel about the concept. He said companies have been around for awhile that make loans to college students, with repayment based not on a fixed schedule of payments on a regular basis but instead their future earnings.
"We thought that that same mindset could be applied to working consumers, not just students, for general household purposes,'' Ginsburgh said.
The amount of funds available, he said, is anywhere between $1,500 and $12,500, with the average contract in the $5,500 range. Customers get a repayment schedule running from two to five years, with the obligation being no more than 10 percent of someone's income.
The plus for the customer, he said, is that link to the earnings.
Ginsburgh used the example of his company providing $5,000 to a consumer over a three-year contract.
"If they are serially unemployed or they have volatility in their income, and they're making their prescribed payments to us -- even if those payments are zero because they're unemployed -- and over the life of the agreement they only pay us back $4,000, that's it,'' he said.
"The agreement ends,'' Ginsburgh said. "There's no catch-up, no kind of balloon at the end. That is the equity-like risk we are taking.''
But the system is built on the assumption that Align, having gotten information on the person's income, credit score, education level, industry of employment and the proposed use of the proceeds, ultimately will get back more than the amount advanced.
"We've built our own underwriting model that we use to quote each applicant a term of their agreement and a percentage of income to fund them,'' Ginsburgh said. "It varies, person by person, based on their own unique factors.''
That still leaves the question of the interest rate, something that might be useful to customers in deciding whether to agree to the deal.
"Because we are not a licensed lender in the states that we operate, we are not obligated to provide an APR because we don't know what the cost of funds is going to be over the life of the agreement,'' Ginsburgh said. But he said the contract has "significant disclosures that allow them to compare the potential cost of an ISA to a loan in different income scenarios.''
That means one set of figures if someone's income goes up during the life of the agreement and another set if someone's income goes down.
Ginsburgh said he's not concerned that someone might choose to forego or delay a raise to avoid having to pay more to Align. He said that since the maximum take of someone's income is 10 percent, that still leaves the customer with the other 90 percent of any pay hike, more than enough incentive to take the raise.
And he said that if someone has a sudden windfall the deal can be ended with a buy-out at less than the person would have paid had the contract run its full length.
Anderson said it's not like the decision of his agency to allow Align to operate here actually breaks any real new ground. He said the company already does business in other states, including California which he said has much stricter lending laws than Arizona.
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