New regulations aimed at curbing the excesses of payday lenders are now in effect, but they will not be the last word on the subject.
Proponents of the new regulations passed by lawmakers during the 2011 session say they’re needed because the practice of offering short-term, high-interest loans to consumers has led thousands of Texans into a cycle of debt and dependency. Lawmakers heard horror stories about consumers being charged interest rates in excess of their initial loans.
Absent these regulations, the number of payday loan businesses in Texas has more than doubled, from 1,279 registered sites in 2006 to more than 3,500 in 2010. Opponents say this industry has flourished because of a 1997 law intended to give organizations flexibility to help people repair bad credit. A loophole allowed payday lenders to qualify, giving them the freedom to operate without limits on interest rates.
Though the new laws took effect on Jan. 1, state regulators have been working for months to finalize the language of the rules, and businesses are in the process of coming into compliance. Eventually, lenders will be required to disclose more information to their customers before a loan is made, including the cost of the transaction, how it compares to other types of loans and interest fees if the payment is not paid in full.
Consumer and faith-based groups say payday lenders have run amok with their promises of providing desperate Texans with quick money. (They started the website Texas Faith for Fair Lending to raise awareness about the problem.) In the midst of the regulation debate in the Texas Legislature, Bishop Joe Vasquez of the Catholic Diocese of Austin testified that nearly 20 percent of the people the diocese was assisting had reported using payday and auto title loans — and that debt was the reason they sought help from the church.
“If payday lenders were not making money from these families to line their own pockets, perhaps these families would not need the charitable and public assistance they receive,” Vasquez said in the February 2011 hearing. “They are generally embarrassed to admit they sought a loan without understanding the fees involved. We are concerned that our charitable dollars are in fact funding the profits of payday lenders rather than helping the poor achieve self sufficiency.”
See here, here, and here for some background. While the legislation passed in 2011 was a baby step in the right direction, I don’t really expect it to have much effect. As the story notes, a bill to cap interest rates on payday loans, which can be 500% or more, failed to pass thanks to a strong lobbying effort by the payday loan industry. There’s already legislative recognition that the job is unfinished, so we can hopefully expect more action in 2013, assuming it doesn’t get squeezed off the calendar by bigger issues like the budget, school finance, and re-redistricting. I don’t expect very much from the laws we actually got, but I am prepared to be pleasantly surprised.
One other factor that may be in play here is the Consumer Financial Protection Bureau, which can start to fulfill its mission now that it has a director. While Richard Cordray did not directly address payday lending in his opening remarks, it’s not hard to imagine the subject coming up, and it’s not hard to imagine the feds taking a more aggressive approach than the state did. Given that one of the main proponents in the Lege for more aggressive action had been Rep. Tom Craddick, it’ll be interesting to see how that dynamic plays out if it comes to pass. Would Republicans like Craddick and State Sen. John Carona hew to the feds-bad, states-good party line even as the feds supported their position, or would there be some fractures in that front? It’ll be worth keeping an eye on this.