Part of me hopes that there’s a lot of complaints, and part of me hopes there’s very few.
Houston’s stringent new rules on payday and auto title lenders took effect Tuesday, reviving industry complaints that it would drive companies out of business, or at least out of the city, but giving borrowers a clearer path out debt.
“We’ll see stores close, we’ll see people laid off,” said Rob Norcross, of Consumer Service Alliance of Texas, a loan industry group. “You’ll have some companies that will maintain stores at lower revenue levels, and they’ll probably close other ones. We’ve only seen a couple companies close up shop totally in the other large metropolitan areas. It will be a gradual process.”
He predicted borrowers whose needs exceed the city’s new limits will go to lenders in unregulated areas, get a loan online or take out several small loans to add up to the amount they want.
Payday lending involves small, short-term loans that avoid legal caps on fees and interest that apply to such mainstream lenders as banks. Title loans operate similarly and are secured by the borrower’s automobile title, leaving the vehicle at risk for repossession. Borrowers typically lack the funds or credit to get loans any other way.
In the 10-county Houston region, home to a fourth of the state’s 3,240 such lenders, data show borrowers refinance more and pay on time less than state averages and that more than 100 title borrowers have their cars repossessed each week.
Houston’s ordinance limits payday loans to 20 percent of a borrower’s gross monthly income and auto title loans to 3 percent of the borrower’s gross annual income or 70 percent of the car’s value, whichever is less. Single-payment payday loans can be refinanced no more than three times, while installment loans can include no more than four payments. The principal owed must drop by at least 25 percent with each installment or refinancing.
On the first day of enforcement, city officials had identified 361 active payday and auto title lenders inside Houston’s city limits, 309 of which had registered under the new rules as of Tuesday morning.
Toya Ramirez, a staff analyst in the city’s Administration & Regulatory Affairs department hired to oversee the ordinance, said it was unclear which of the remaining 52 lenders have closed, moved outside city limits or simply failed to register.
Ramirez said the city will approach enforcement using a complaint-based system, and said there are no stings or compliance audits planned.
The ordinance was passed in December, with a grace period to allow the lenders to get up to speed. Houston’s original plan was to do enforcement more aggressively, but I’m okay with this approach. For now, anyway. If the payday lenders are mostly compliant with the ordinance, there won’t be any need to be more proactive. My prediction is that despite Rob Norcross’ crocodile tears the industry will continue to profit handsomely, just a little less handsomely than before. If that does wind up squeezing a few operators out – as we can see by this map, there’s plenty of them – that will be fine by me.