Texas Payday Loan Report: Loopholes Could Be Tighter
By Paul RizzoPayday Loan Writer
Texas has laws prohibiting payday advance loan lenders from charging high interest rates. It just doesn’t look that way.
Companies that provide short-term loans at high interest rates use out-of-state lending partners to get around Texas’ usury laws.
Now, some state legislators are gearing up to close those loopholes and strengthen regulation of the Texas payday loan industry, even as the industry launches a major public relations campaign aimed at polishing its image.
The payday lending industry says it provides an important service to consumers who need occasional help paying their bills – potentially avoiding more costly late fees or reconnection charges on their utilities.
Critics say the practice amounts to predatory lending, with service fees and shockingly high annual percentage rates that keep the working poor trapped in debt.
“Predatory lending is a plague,” says Sen. Eliot Shapleigh, D-El Paso, who’s written bills for the current legislative session that would put bad credit cash loan lenders under tighter oversight. “In America today, in the top 10 cities where predatory lending is worst, seven of them are Texas cities. All are minority communities, where predators have closed the door to mainstream banking and prey on soldiers, young women and struggling families.”
Third-party lenders
No fax payday loan lenders in Texas used to partner with banks based in states without usury laws, and those banks would actually provide the payday loans. In 2005, federal banking regulators discouraged banks from providing such loans.
“We’re not dealing so much with banks anymore,” says Leslie Pettijohn, Texas consumer credit commissioner. “The federal regulators have changed their criteria and have instituted guidelines.”
Instead, payday lenders are using anonymous third-party lenders under state laws regarding credit services organizations, or CSOs, the companies that offer to help repair your credit.
“The CSO model has been their attempt to escape regulation of any kind. It’s really, really unregulated at this point,” says Don Baylor, senior policy analyst at the Center for Public Policy Priorities in Austin. “High-cost payday loans are considered among the most destructive financial products in the marketplace.”
A bill written by Mr. Shapleigh would close the CSO loophole by limiting CSO associations with lenders “to evade our state usury laws.”
“Since July 2005, [cash advance payday loan] lenders have exploited this loophole to deregulate their industry and charge unlimited rates for payday loans,” Mr. Shapleigh’s office says. “Since the switch to the CSO model, prevailing interest rates have increased by 25 to 40 percent.”
In the current environment, Texas regulators’ hands are tied.
“We’re at an odd situation here in Texas in the current market,” Ms. Pettijohn says. “The vast majority of [payday cash loans] are not regulated in Texas.”
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