En­force state law on lend­ing

Austin American-Statesman - - OPINION -

Lob­by­ists for the multi­bil­lion-dol­lar pay­day and auto ti­tle loan in­dus­try blan­keted Capi­tol Hill in re­cent months. But ul­ti­mately they could not fend off the full specter of tighter reg­u­la­tion con­tained in fed­eral fi­nan­cial re­form leg­is­la­tion.

The new law cre­ates a Bureau of Con­sumer Fi­nan­cial Pro­tec­tion within the Fed­eral Re­serve with the power to reg­u­late a wide ar­ray of con­sumer fi­nan­cial ser­vices, in­clud­ing pay­day loan providers.

The law is a ma­jor step for con­sumer pro­tec­tion, but does not ab­solve Texas from the need to re­solve its own lend­ing cri­sis. With thou­sands of store­fronts across Texas and on­line, find­ing a pay­day or auto ti­tle loan is easy — but deal­ing with the fi­nan­cial havoc they cre­ate is not.

Some of the largest pay­day and auto ti­tle chains are based in Texas, and they are evad­ing state con­sumer lend­ing laws. They are ex­ploit­ing a loop­hole in the Credit Ser­vices Or­ga­ni­za­tion Act, a state law meant to cre­ate ba­sic guide­lines for credit re­pair busi­nesses — not to reg­u­late a huge lend­ing in­dus­try.

The only “ser­vice” pro­vided by these len­ders, mas­querad­ing as “credit ser­vice or­ga­ni­za­tions,” is some of the high­est in­ter­est rates charged any­where in the coun­try. At over 500 per­cent an­nual pr­cent­age rate, the av­er­age pay­day bor­rower pays $840 for a $300 loan. How can that hap­pen? Pay­day bor­row­ers must pay a loan fee of $60 or more each time they can­not re­pay the loan in full within two weeks. The av­er­age bor­rower pays this fee nine times. Fees for a one-month $4,000 auto ti­tle loan ex­ceed $1,200, and missing a monthly fee pay­ment will re­sult in a car or truck be­ing re­pos­sessed.

Texas can­not af­ford to wait for a fed­eral bureau to rein in an out-of-con­trol in­dus­try. More and more re­sources of strapped so­cial ser­vice agen­cies are be­ing tapped to as­sist des­per­ate fam­i­lies trapped in a cy­cle of pay­day and auto ti­tle loan debt. The Sal­va­tion Army in Port Arthur re­ports that about a dozen peo­ple a week ask for help with a util­ity bill or rent pay­ment be­cause they are mired in pay­day and auto ti­tle loan debt.

A coali­tion of or­ga­ni­za­tions — in­clud­ing Texas Ap­ple­seed, the AARP, the Texas Chris­tian Life Com­mis­sion, United Way of Greater Hous­ton, the NAACP and more — launched a cam­paign to re­form pay­day and auto ti­tle lend­ing in Texas. The cam­paign (

is or­ga­nized around a sim­ple prin­ci­ple: Charg­ing 500 per­cent in­ter­est is wrong.

Al­ready Bexar County and nine Texas cities, in­clud­ing San An­to­nio, Mid­land, Brownsville and Irv­ing, have ei­ther adopted a res­o­lu­tion call­ing on state elected of­fi­cials to close the “credit ser­vice or­ga­ni­za­tion” loop­hole in 2011 or have passed or­di­nances to re­strict the pro­lif­er­a­tion of pay­day and auto ti­tle busi­nesses in their city lim­its.

The Texas Credit Union Com­mis­sion re­cently af­firmed fair lend­ing stan­dards for credit unions of­fer­ing small dol­lar loans. It is time that other Texas govern­ment of­fi­cials and politi­cians take a stand and cre­ate fair stan­dards in the mar­ket to rein in preda­tory play­ers.

Many other states have taken ac­tion on abu­sive lend­ing prac­tices. Six­teen states and Washington, D.C., hold len­ders to an an­nual per­cent­age rate around 36 per­cent — the same rate that the fed­eral govern­ment im­poses on pay­day and auto ti­tle loans to mil­i­tary fam­i­lies. Some states, like Arkansas, low­ered that ceil­ing to 17 per­cent in­ter­est.

No one wants to put pay­day and auto ti­tle loan com­pa­nies out of busi­ness. But, to do busi­ness in this great state, these multi­bil­lion-dol­lar com­pa­nies must be­come li­censed and com­ply with the state’s ex­ist­ing con­sumer lend­ing laws — not op­er­ate as if Texas is still the Wild West and there is no mar­shal in town.

Texas of­fi­cials must en­force state law and close the loop­hole that al­lows lend­ing at such preda­tory rates.

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