Industry Insiders Favor Effects of Issue No. 2

A change voters made to the state Constitution in November will have little effect on most lenders and most borrowers.

But Issue No. 2 – which will be assigned a permanent amendment number, tentatively Amendment 89 – might prove a lifesaver for certain retailers.

“It’s probably one of the most important pieces that’s happened to automotive dealers, furniture dealers and jewelry dealers in a long time,” said Lamar Murphy, executive director of the Arkansas Independent Automobile Dealers Association, based in Magnolia.

Among other changes (see sidebar) Issue 2 eliminated interest rate limits on bonds issued or loans made by governmental bodies in the state.

It also altered the limit on loans financed by noncommercial bank lenders, such as furniture stores and used auto dealers, who can now charge up to 17 percent interest.

Before the amendment, these businesses could charge no more than 5 percentage points above the discount rate, the interest rate the Federal Reserve charges to banks.

That rate has dropped dramatically in recent years. Its plunge began in mid-2007, when the first cracks in the economy started to show. At that point, the discount rate was 6.25 percent, meaning tote-the-note outfits in Arkansas were allowed to charge up to 11.25 percent on, say, a sectional recliner or a ‘96 Honda Accord.

By January 2009, the Fed’s aggressive action to stave off economic disaster had resulted in a discount rate of just 0.5 percent, meaning those Arkansas retailers could charge no more than 5.5 percent on financing.

That lending scenario “just didn’t make economic sense,” said Randy Zook, president and CEO of the Arkansas State Chamber of Commerce, which supported Issue 2.

“They were having to borrow money for 6 or 7 percent and try to loan it out to finance sales at 5 or 6 percent,” Zook said. “You can’t do that, not for very long anyway.”

However, federal laws exempt banks and credit unions from Arkansas’ usury law and could charge higher interest rates. This was true as well for retailers who steered customers to financial institutions domiciled outside of the state.

That made it hard for many independent retailers to compete, said Randy Lann, executive director of the Arkansas Homefurnishings Association.

“Not everyone does in-house financing,” Lann said. “A lot of them do outside sourcing, but the mom-and-pop operations that do in-house have pretty much been shut out of business for the last couple of years with the interest rates dropping like they are. In fact we’ve lost close to 50 retail stores in the last 24 to 36 months, and it’s because of this.”

Lann estimated about 40 percent of the furniture retailers in the state provide in-house financing and will therefore benefit from the new usury law.

 

Rate Relief

These retailers did get a break starting in June 2009, when a temporary override of the Arkansas usury law took effect. Then-Sen. Blanche Lincoln, D-Ark., had included the override in a federal spending bill. That override expired Dec. 31, and the usury amendment took effect Jan. 1.

Lincoln’s action came at a good time, said Ray Kordsmeier Jr., president of Kordsmeier Furniture of Conway.

At that point, many lenders “had really clamped down on who they were accepting,” he said. “We picked up an awful lot of really good customers who had never been turned down before, but because of the economy and all those other issues, suddenly they were being turned down on an existing credit line. So it allowed us to do business with people we were very happy to have on our books.”

The new law will likely lead to more competitive pricing among retailers, because they’ll no longer have to make up for low-to-nonexistent interest revenue with higher prices on merchandise, Zook said.

Kordsmeier said he had already reduced prices at his store thanks to the changes in the usury law. It has also allowed him to offer financing to customers who might have less-than-ideal credit scores, but who are nonetheless a good credit risk and will be likely to pay their bills on time.

Doug Brashears, president of Brashears Furniture Inc. of Berryville, is an ex-officio director with the Homefurnishings Association.

He said his business uses an out-of-state lender and so won’t see a big change resulting from the new usury law. However, it will “open a lot of doors for a lot of consumers,” he said. “And I think particularly in smaller communities, there are still a lot of retailers that are very credit oriented.”

 

‘Outdated Law’

For many independent auto dealers, the new law “will put us on a level playing field with the out-of-state dealers and the out-of-state finance companies,” according to Murphy, executive director of the Arkansas Independent Automobile Dealers Association.

Under the old law, an ultra-low federal discount rate meant a used car dealer “couldn’t take any risk on a credit-challenged customer,” he said. “With Issue 2 and this new amendment, it will allow us to at least recoup our money, if not make a little money on the interest so you can take more risk to take care of that credit-challenged customer.”

The previous limit “was an outdated law that needed to be fixed,” Murphy said. “I believe that it’s what Arkansas needed to keep some money in the state, because there’s no telling how much money went out of the state with out-of-state finance companies coming in and taking it out.”

Murphy said customers with low credit scores were likely to get better interest rates under the new law.

“I think it’s a huge impact on used car dealers who do a lot of in-house financing and, specifically, for a publicly owned company like Car-Mart, it was pretty huge for them,” said Dennis Jungmeyer, president of the Arkansas Automobile Dealers Association. “From an impact standpoint, what it did and will continue to do is open up credit for those individuals who would be on the bubble with a credit score.”

Jeff Williams, CFO of Car-Mart Inc. of Bentonville, echoed that assessment.

“We certainly feel it will free us up to make more loans in Arkansas. … It’s going to be healthy for overall commerce,” Williams said.

Since the federal override took effect in June 2009, Car-Mart has been charging 12 percent in Arkansas, so customers won’t see a big spike in interest rates.

Michael Pakko, chief economist for the Institute for Economic Advancement at the University of Arkansas at Little Rock, said the change will have a positive overall effect for consumers and businesses.

“For some kinds of loans, those very strict low limits simply made credit unavailable,” Pakko said. 

 

 

Law School Dean: Reversal of Issue 2 a Long Shot

 

One possible, though unlikely, setback for the recently passed Issue 2 could come from the Arkansas Supreme Court.

In September April Forrester of Jacksonville filed a lawsuit seeking to block Secretary of State Charlie Daniels from certifying the results of the vote on Issue 2. The suit claimed the amendment was unlawful because it combined three issues into one ballot initiative.

Among that and other allegations, the suit also claimed the wording of the initiative did not make clear to voters that interest rates from some retailers could increase to 17 percent. The suit was filed in Pulaski County Circuit Court and the Supreme Court. The high court ruled it did not have original jurisdiction because the initiative was legislatively referred, and therefore the case had to be heard first in the Circuit Court.

Pulaski County Circuit Judge Mary McGowan disagreed with Forrester’s allegations, and the case was appealed to the Supreme Court, which has yet to issue a ruling.

John DiPippa, a constitutional law professor and dean of the William H. Bowen School of Law at the University of Arkansas at Little Rock, said the chances of the Supreme Court ruling against Issue 2 are a long shot.

“It would take an awful lot for the court to strike down the amendment,” he said.

If any one of the plaintiff’s claims were valid, it would be the claim that Issue 2 presented more than three items in one amendment, DiPippa said. In addition to eliminating interest rate caps for government loans and bonds, the amendment also allowed retailers to charge up to 17 percent interest on financing and gave constitutional authority to governmental entities to energy-efficiency project bonds.

“Still, in previous cases the court has looked at that challenge and said as long as they’re related to the same subject matter, it will be OK to include them in the same amendment,” he said.

“Given the circumstances here, it’s after an election and even with regular ballot amendments, the court is reluctant to strike down the vote of the people, and that it’s a legislatively referred one where the court’s review is very narrow anyway, there’s just not a lot to go on,” he said.

– Robert Bell