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The payday lenders’ new tricks

You really need to read Forrest Wilder’s story about the latest scheme by payday lenders to skirt regulation.

As serendipity would have it, I had stumbled onto the latest mutant creature in the wild and wooly world of Texas payday lending. “What you’ve come across is really important,” said Ann Baddour of Texas Appleseed, an Austin-based group that advocates for social and economic justice. “It looks like they have found a loophole within a loophole,” one that allows Cottonwood Financial (d/b/a Cash Store) to escape new, albeit meager, licensing and disclosure requirements passed by the Texas Legislature as well as more stringent rules adopted by Austin, San Antonio and Dallas.

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What’s different about Cash Store’s loans versus a “regular” payday loan? Instead of signing a postdated check for the amount due, like you would in a true payday loan, the Cash Store had me sign a photocopy of a blank check. That small change apparently has magical powers. Voila! Not a deferred presentment transaction, not a payday loan, not a credit access business, and apparently not subject to Texas regulations.

Experts I consulted said the arrangement looked legal on its face, but raised troubling questions about the state’s convoluted and extraordinarily lax legal apparatus surrounding payday and title loans. (You can view my contracts here.)

“There are new products in the payday and auto-loan field that raise questions,” said state Sen. John Carona, a Dallas Republican who chairs the Senate Business and Commerce Committee. “These approaches appear to skirt local ordinances as well as state law. Carona said he would consider filing legislation to address the problem next year.

Read it and learn the details. What this ultimately boils down to is the fact that there are no limits on interest rates and fees that payday lenders can charge, which leads to effective annual percentage rates in the hundreds, even thousands. People who are forced by circumstance to take out one of these loans are often trapped, sometimes for years, paying fees without ever being able to pay off the principal. The simple solution is to do what other states have done and impose caps on interest rates and fees. If the Lege is serious about taking another crack at reform, this is what the goal needs to be.

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2 Comments

  1. John says:

    Maybe if the FED started forcing traditional banks to lend you would not have this issue. Borrowing from the FED at 50 bps (or less) and lending at 8 or 9% including collection loss the banks would still make money

  2. Ross says:

    Banks can’t make money on small loans – their transaction costs are too high. Credit unions can manage small loans far better, but even they are leery of lending to the sort of folks who use payday lenders. I would like to see a study of payday borrowers showing what sort of gadgets they have. so many folks spend far too much on cell phones and televisions, it’s not surprising they have problems running short of money from time to tome, especially when you couple the general issue the poor have with bad decision making.

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