In the early 1950's the Court went back to very restrictive interpretation of 10 per cent simple interest. It was at this time that the major finance companies sarted to withdraw their business from Arkansas. Today a very few major finance companies and none of the major personal finance companies are engaged in business in Arkansas. The only finance companies operating in the State are those that are related to the automobile industry. This ancient and unusually severe restrictive interest rate has had a very bad effect on the general economy of Arkansas. Arkansas like many of the other southern states is a capital poor state. It has had to import the capital necessary for its economic development. This has been accomplished through industrial revenue type bonds that have the advantage of a tax-free status. Without these, industrial development in Arkansas would be at a standstill. The most serious consequence of the Arkansas restrictive interest rate was felt this last fall when the prime interest rate reached 10 per cent, a rate which was equal to the maximum interest rate that could be charged in Arkansas. With bumper crops in cotton, rice and soybeans, those out-of-state financial organizations that had been financing the processing and storage of the Arkansas crops refused to come into Arkansas at a 10 per cent interest rate when their funds were earning much higher rates in competitive markets. This became a very serious matter and could have had a very devastating effect on the Arkansas economy. The reason it did not have worse effects was that the price of the agricultural crops was good, and the crops did not stay in process very long but moved into the market so that the funds accelerated through the economy at a very rapid pace. The general consumer in Arkansas also suffers from this restrictive interest rate. Studies conducted by research teams of the University of Arkansas have conclusively proved that the cost of major appliances in Arkansas is anywhere from 8 per cent to 12 per cent higher than the same article in stores in adjoining states. This is due entirely to the fact that the credit seller makes up the difference in his cost of credit by raising the basic price of the product. Dr. Gene Lynch of the University of Arkansas College of Business Administration has published an extensive study of this which has brought home to the Arkansas consumer the fact that he is being penalized by the unusually restrictive 10 per cent simple interest rate. Another important area that has been affected by this rate is the building industry. Interim construction loans at the 10 per cent rate are not attractive to larger investors. Consequently, Arkansas has been bypassed. Some of the major local developers have circumvented the Arkansas law by the organization of out-of-state subsidiary corporations which acquire their funds from out-ofstate lenders, using their Arkansas lands and land contracts as security for their loans. The Arkansas Supreme Court has interpreted this to be a non-Arkansas contract governed by the laws of the state in which the subsidiary is located. The consequence of this is that it forces legitimate, profitable business to leave the State of Arkansas and be domiciled in other states because of the restrictive interest provisions. Probably the most serious consequence has been in the Arkansas banking industry. As the rates on the large certificates of deposit have moved upward in excess of 10 per cent, it has been very difficult, if not impossible, for Arkansas banks to pay rates competitive with those of surrounding states. During this last fall Arkansas bankers had very aggressive competition from banks in surrounding states offering larger depositors 11 per cent and 12 per cent on short-term certificates of deposit. This has resulted in a major outflow of this type of investment funds from the state when it is badly needed. There is currently a group which has filed a petition with the Attorney General asking for a referendum election on the interest rate provision of the Arkansas Constitution. If this petition is successful, it will put the interest rate ceiling into the hands of the legislature, so that it can be reviewed on a periodic basis. The problem now is that we are trying to operate in a 1974 economic environment with a 1874 interest rate ceiling. Until this is changed, or until a degree of flexibility is permitted, Arkansas will continue to be a state that has difficulty in attracting outside capital and Arkansas banks will continue to have difficulty in serving the consumer banking market with the type of services that consumers in other states have come to enjoy. [From Tapestry, Vol. III, No. 11, March 18, 1974.] A CHECKLIST OF USURY EFFECTS (By Dr. Charles S. Venus, Worthen Bank's Consulting Economist) Since we have started discussing the possible change in the Arkansas Constitutional usury provision, a good many of our employees have asked me just what the effects of the usury provision are. and what we should tell our customers about it. A good bit of research has been done on this, and more is being done at this time. Through the years this research has pointed out the following effects of our 10% simple interest limit: 1. CASH prices are higher in Arkansas than in surrounding states, because the cash price must include the credit costs not covered because of the usury limit. As far back as 1968 a study found the difference to be from 3% to 7%. So we pay the higher credit costs anyway, except that in Arkansas the CASH buyer pays more to subsidize the credit buyer. 2. Arkansas border cities suffer from lack of growth compared to their border counterparts. Texarkana and West Memphis are good examples, where most businesses are located on the non-Arkansas side of the border. A 1972 study points out that Texarkana, Arkansas, has one automobile dealer, while Texarkana, Texas, has 16, although their populations aren't that different (about 22,000 in Arkansas, 31,000 in Texas). 3. The low limit eliminates risk capital and risk takers. Ambitious people cannot get financing without capital holders "buying in," so they are inclined to create their business elsewhere, where there is more opportunity to fully own and control their business. 4. Arkansas merchants limit credit sales, and those who do give credit demand faster payment than merchants in other states-12 to 18 months compared to 24 to 36 months. This is just logical good business practice since the limited credit charge does not cover the full costs of extending credit. 5 Credit standards for Arkansas consumers are abnormally high, meaning a smaller proportion of our people can buy on credit. If credit charges do not cover costs and risks of losses, business must be more selective about lending. There are other effects, but as Mr. James Mitchell stated in his study USURY in ARKANSAS, in 1972: "Arkansas buyers, who have less income than those of any other state save Mississippi, pay more for similar items than do out of state buyers when they pay cash. And they pay cash more often because they have a harder time getting credit." [From Tapestry, Vol. III, No. 12, March 25, 1974.] USURY AND RETAIL PRICES IN ARKANSAS (By Dr. Charles E. Venus) One of the effects of the 10% simple interest usury limit in Arkansas' Constitution is that cash prices in Arkansas are higher than are prices in states where credit charges can pay the full costs of credit. Our cash prices must be high enough to make up the difference. The effect is that cash customers subsidize credit customers. More research is being done on this effect now, but an earlier study by Dr. Gene Lynch of the University of Arkansas detailed the difference, and was partly included in the Report of the National Commission on Consumer Finance, Consumer Credit in the United States, in 1972. Forming an index with a base price set at $100 for Little Rock, comparable prices in the neighbor-state cities were found to be as shown in the Table. Both competition and transportation costs will make some difference in prices among cities, but notice that all the areas are lower than Little Rock; the difference ranging from $2.49 to $4.85. The normal credit charge in other areas is 1.5% a month, compared to our .541%. The difference, on $100 borrowed for one year, on a monthly payment basis, comes to $4.54! The cost of extending credit must be paid somehow, by somebody. The Arkansas usury ceiling causes the difference to be included in the cash price. So if we buy for cash, either because we can't get or don't need credit, we pay more than we would if credit users carried their own costs. All this resulted since Arkansas applied its maximum interest rate to consumer retail credit. 66 And today, some people want to establish lowa's retail credit rate at 12%. Statements concerning the credit situation in Arkansas are documented throughout this booklet with source notations. More extensive materials concerning the Arkansas situation can be obtained by writing the sponsors of this brochure... The Iowa Retail Federation, Inc. 324 Fleming Building, 218 Sixth Avenue, Des Moines, Iowa 50309. It's happening in Arkansas right now. Don't let it happen in Iowa. Don't let ...cash customers be forced to pay higher prices ...responsible citizens be denied credit in Iowa ... loan sharks get started ...restrictive rates deter merchant's expansion in Iowa ...border residents go out-of-state to shop Don't let 12% become law in Iowa. Act now. Contact your legislator. 76 |