Enforce state law on lending
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.