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Wonkblog on Texas cities’ efforts to combat payday lenders

It’s always nice when the national media notices something positive happening in Texas instead of the usual.

The number of payday and auto title loan outlets has skyrocketed since 2005. (Texas Appleseed)

Four years ago, ACE Cash Express was the company that turned Dallas Council member Jerry Allen into the payday loan industry’s worst enemy.

The day before he was about to celebrate the launch of the Bank On Dallas program, which helps people get bank accounts, Allen got a call from a lobbyist asking if he would meet with the ACE’s executives. He didn’t have time, and declined. But the next day, along with regular council business, it became apparent that two council members had taken the meeting: They made a proclamation declaring ACE a model corporate citizen, after it donated $100,000 to relief efforts in Haiti. “It irritated me that these guys thought they could play that game,” Allen said. “It was game on.”

Texas has been a gold mine for payday lenders since 2005, when a court ruling sanctioned a loophole in usury laws that allowed them to charge whatever interest they pleased. Storefronts proliferated to the point where, according to a 2012 report by Texas Appleseed, the state accounted for 60 percent of the four biggest publicly traded firms’ profits. A major push by religious and community groups to pass restrictions in the state legislature failed in its last biannual session, in 2013; they only managed to require that borrowers be provided with certain disclosures when they took out loans.

Allen, however, had already started pushing on a different front. In 2011, he got an ordinance passed that limited the number of installments on a loan to four, each of which must pay down 25 percent of the loan principal, and can’t exceed 20 percent of a borrower’s paycheck. On top of that, the council passed zoning restrictions that prevented new shops from opening within certain distances from highways, residential areas, and other payday lenders.

It’s not really an aggressive set of rules. Because municipalities aren’t allowed to legislate much on top of an area already regulated by the state, Dallas didn’t limit the actual interest or fees the lenders could charge, so as to remain safe from legal challenges. Still, Allen says, not one single new “credit service organization,” as they’re called in the state, has applied to set up shop in Dallas since it passed. And meanwhile, 17 other cities — including most of the largest, besides Fort Worth — have passed similar rules. That’s left advocates, especially Allen, feeling triumphant.

“You can run, but you better run fast, because we’ve got jets on,” Allen says. “Go down your rabbit holes, because we’re going to put concrete in ‘em. We’ve got ‘em on the run, and we’re shooting ‘em in the back.”

Allen doesn’t hold out much hope that Texas’ next legislative session will significantly strengthen or standardize the ordinances that cities have been adopting on their own; he’s just hoping the conservative House won’t overrule them. In the mean time, he’s waiting for the CFPB’s expected rulemaking in the fall, which could include national requirements for a borrower’s ability to pay back loans, even though the agency can’t cap the interest rates outright. And importantly, he’s working to develop alternative banking services, so people don’t find themselves in Gail Rowland’s shoes in the first place — a common critique of the industry, which says people will just seek out even worse options if they can’t borrow against their next paycheck.

One possible substitute: Community loan centers, like this one in Brownsville, Tex., which offer more affordable small-dollar loans. They’ll have an easier time expanding once payday lenders retreat, as they have in most places that place serious limits on their operations.

“If there’s a situation where people don’t have access,” Allen says, “well then dad gummit, we’ve got to get it to them.”

The “go where the customers are” approach of Select Federal Credit Union (SFCU) in San Antonio is another possible substitute. I’m glad to see people paying some attention to that, because it undercuts the one argument that the payday lenders have for themselves, and I strongly suspect they will not be able to handle this kind of competition. I had forgotten about the zoning restrictions in the Dallas ordinance. The Houston ordinance doesn’t have anything like that. Not because of the Z-word – we have no problem restricting where bars, liquor stores, and strip clubs can operate; there should be no reason we couldn’t do the same with payday lenders. That’s something I’d like to see considered as an extension of our ordinance down the line, maybe next year. I understand CM Allen’s pessimism about state action on payday lenders, but do keep in mind that one candidate for Governor has helped lead the fight against payday lenders, while the other candidate greatly enabled their expanded presence. Just look at that chart above to see the effect. You want to improve the odds of state action, or at least greatly reduce the odds of any attempt to claw back what the cities have done, you know who to vote for this fall.

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