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Consumer Financial Protection Bureau

Here come those CFPB payday lending regulations

An update from the AP.

Troubled by consumer complaints and loopholes in state laws, federal regulators are putting together the first rules on payday loans aimed at helping cash-strapped borrowers avoid falling into a cycle of high-rate debt.

The Consumer Financial Protection Bureau says state laws governing the $46 billion payday lending industry often fall short, and that fuller disclosures of the interest and fees — often an annual percentage rate of 300 percent or more — may be needed.

Full details of the proposed rules, expected early this year, would mark the first time the agency has used the authority it was given under the 2010 Dodd-Frank law to regulate payday loans. In recent months, it has tried to step up enforcement, including a $10 million settlement with ACE Cash Express after accusing the payday lender of harassing borrowers to collect debts and take out multiple loans.


The agency is considering options that include establishing tighter rules to ensure a consumer has the ability to repay. That could mean requiring credit checks, placing caps on the number of times a borrower can draw credit or finding ways to encourage states or lenders to lower rates.

See here and here for the background, and ACE Cash Express settlement. Given the efforts by some legislators – backed up by Greg Abbott – to destroy local control, I feel confident that no matter what the CFPB proposes, no matter how reasonable or milquetoasty, will be met by at least one bill filed to nullify it. It’s just how we roll around here.

How much do payday lenders suck?

This much.


Pursuing, or even threatening, criminal charges against payday and title borrowers is strictly prohibited by Texas law, with very few exceptions. The Texas Constitution unequivocally states, “No person shall ever be imprisoned for debt.”

But new research released this morning by Texas Appleseed shows that criminal charges against payday borrowers for missing payments is common in Texas. Texas Appleseed documents more than 1,500 criminal complaints of bad check and theft by check allegations filed by payday loan companies in Texas between 2012 and the spring of this year. Many of them resulted in fines, arrest warrants and even jail time.

The research builds on reporting by the Observer published in July 2013, which found 1,700 instances in which payday lenders in Texas have filed criminal complaints against customers. The Observer story prompted an ongoing investigation by the state Office of Consumer Credit Commissioner, which regulates the industry in Texas, into one payday loan business, Cash Biz. It also led regulators to issue an advisory bulletin to lenders warning them to stop pursuing criminal charges against their customers.

Texas Appleseed found 13 different payday loan companies pursuing criminal charges in eight different counties, including Travis, Dallas, Harris and Collin. Texas Appleseed filed a complaint today with the federal Consumer Financial Protection Bureau, the Federal Trade Commission, the Texas Attorney General’s Office and the state Office of Consumer Credit Commissioner. The complaint letter, which includes 700 pages of supporting documentation calls for state and federal authorities to launch an investigation and take enforcement action against lenders abusing the law and their customers.

“In addition to their outrageous rates and lending practices, payday loan businesses are illegally using the criminal justice system to coerce repayment form borrowers,” said Ann Baddour of Texas Appleseed. “This directly contravenes state and federal law, which eliminated debtor’s prisons long ago.”

In one justice of the peace court in Harris County, the group found that arrest warrants were issued in more than 42 percent of the cases and at least six people served jail time. In Collin County, there were 740 documented criminal cases against payday borrowers—636 from a single lender, PLS Loan Store—and $132,000 collected from borrowers.

Go read the whole thing, and read that Observer story from last year that I managed to overlook at the time. I don’t know about you, but I don’t want my county’s law enforcement apparatus acting as a debt collector for private companies. Here’s the Texas Appleseed press release and the complaint they filed, which lists all the offenders. Consider this your pre-session reminder of why we need state regulation of these shysters. I don’t know what any of the offices that received these complaints can do about it, but I would suggest that boiling them in their own pudding and burying them with a stake of holly through their heart would be poetically just, if perhaps not quite constitutional.

CFPB makes its presence felt in Texas

Good for them.

Texas-based payday lender ACE Cash Express has agreed to pay $10 million to settle allegations by the federal Consumer Financial Protection Bureau that it used harassment and other illegal tactics to push borrowers into a cycle of debt.

Under the agreement, the company, one of the nation’s largest payday lenders, will pay $5 million in refunds to consumers and will also pay a $5 million fine, the bureau said Thursday.

“ACE used false threats, intimidation and harassing calls to bully payday borrowers into a cycle of debt,” bureau Director Richard Cordray said in a statement. “This culture of coercion drained millions of dollars from cash-strapped consumers who had few options to fight back.”

Supporters of payday lending say it offers a needed service to consumers who have few options for short-term loans. Critics say the companies prey on struggling people by charging high fees and trapping borrowers in a cycle of debt.

Nice. The CFPB has been making noise about payday lenders for awhile, with some new regulations still to come. Hey, if you’re not lucky enough to live in a city that has passed a payday lending ordinance, the CFPB is what you’ve got. More like this, please.

The CFPB is almost ready to roll out payday lending regulations

I can’t wait to see what they come up with.

Whenever governments start thinking about cracking down on small-dollar, high-interest financial products like payday loans and check cashing services, a shrill cry goes up from the businesses that offer them: You’re just going to hurt the poor folks who need the money! What do you want them to do, start bouncing checks? 

A field hearing held by the Consumer Financial Protection Bureau today was no exception. The young agency has been studying how the industry functions for a couple years and is now very close to issuing new rules to govern it. To start setting the scene, CFPB Director Richard Cordray came to Nashville — the locus of intense payday lending activity recently — to release a report and take testimony from the public.

The report, building on a previous white paper, is fairly damning: It makes the case that “short term” loans are usually not short term at all, but more often renewed again and again as consumers dig themselves into deeper sinkholes of debt. Half of all loans, for example, come as part of sequences of 10 or more renewed loans — and in one out of five loans, borrowers end up paying more in fees than the initial amount they borrowed.


Passing a rate cap, however, is not the only remedy. In fact, it’s not even possible: The CFPB is barred by statute from doing so.* And actually, the Pew Charitable Trusts — which has been tracking payday lending for years — doesn’t even think it’s the best approach.

“The core problem here is this lump-sum payday loan that takes 36 percent of their paycheck,” says Pew’s Nick Bourke, referring to the average $430 loan size. “The policy response now has to be either eliminate that product altogether, or require it to be a more affordable installment loans.”

Bourke favors the latter option: Require lenders to take into account a borrower’s ability to repay the loan over a longer period of time, with monthly payments not to exceed 5 percent of a customer’s income. That, along with other fixes like making sure that fees are assessed across the life of the loan rather than up front, would decrease the likelihood that borrowers would need to take out new loans just to pay off the old ones.

See here for the background. It’s fine by me if the CFPB takes a different approach than usury caps. States and localities can still do that themselves if they wish, with the CFPB’s rules serving as a regulatory floor. It’s a step forward any way you look at it, with the potential to do a lot more if needed.

Now, the installment loan plan wouldn’t leave the industry untouched. When Colorado mandated something similar, Pew found that half of the storefront payday lenders closed up shop. But actual lending didn’t decrease that much, since most people found alternative locations. That illustrates a really important point about the small dollar loan industry: As a Fed study last year showed, barriers to entry have been so low that new shops have flooded the market, scraping by issuing an average of 15 loans per day. They have to charge high interest rates because they have to maintain the high fixed costs of brick and mortar locations — according to Pew, 60 percent of their revenue goes into overhead, and only 16 percent to profit (still quite a healthy margin). If they were forced to consolidate, they could offer safer products and still make tons of money.

Meanwhile, there’s another player in the mix here: Regular banks, which got out of the payday lending business a few months ago in response to guidance from other regulators. With the benefits of diversification and scale, they’re able to offer small-dollar loans at lower rates, and so are better equipped to compete in the market under whatever conditions the CFPB might impose.

Actually, there are two other potential players here as well: Post offices and WalMart stores, both of which could do a lot to streamline this industry by aggressively competing on price. If that happens to drive a lot of small, inefficient players out of the market, too bad for them. These options would unfortunately require an act of Congress to become reality, and the odds of that are vanishingly small. But the point is that those options exist, and if the regs that the CFPB does put forth winds up squeezing a lot of the existing players, the demand will be there for bigger dogs to come in. In most cases that would be bad, but this is the exception. We’ll see how it goes. And whatever does eventually happen, let’s not forget that if we had less poverty, we’d have less demand for payday lending. Consider that yet another argument for raising the minimum wage.

Another way to squeeze the payday lenders

I wholeheartedly approve of this.

The Postal Service (USPS) could spare the most economically vulnerable Americans from dealing with predatory financial companies under a proposal endorsed over the weekend by Sen. Elizabeth Warren (D-MA).

“USPS could partner with banks to make a critical difference for millions of Americans who don’t have basic banking services because there are almost no banks or bank branches in their neighborhoods,” Warren wrote in a Huffington Post op-ed on Saturday. The op-ed picked up on a report from the USPS’s Inspector General that proposed using the agency’s extensive physical infrastructure to extend basics like debit cards and small-dollar loans to the same communities that the banking industry has generally ignored. The report found that 68 million Americans don’t have bank accounts and spent $89 billion in 2012 on interest and fees for the kinds of basic financial services that USPS could begin offering. The average un-banked household spent more than $2,400, or about 10 percent of its income, just to access its own money through things like check cashing and payday lending stores. USPS would generate savings for those families and revenue for itself by stepping in to replace those non-bank financial services companies.


But while ending triple-digit interest rates and fine-print tricks is a good thing for consumers, it doesn’t reduce the demand for those financial services. The USPS could slide into that space and meet that need without preying upon those communities. “Instead of partnering with predatory lenders,” David Dayen writes in The New Republic, “banks could partner with the USPS on a public option, not beholden to shareholder demands, which would treat customers more fairly.” America’s post offices are an ideal physical infrastructure for furnishing these services to communities currently neglected by banks. Roughly six in 10 post offices nationwide are in what the USPS report calls “bank deserts” — zip codes with either one or zero bank branches.

I noted that David Dayen story in a previous linkdump. I like this idea for the same reason why I like the idea of letting Wal-Mart open banks: It would provide low-cost banking and financial services, including short-term, low-dollar loans, to a large class of people whose only current options are high-cost predatory lenders. Anything that puts downward pressure on the price of these services and makes savings and checking accounts available to people who don’t have them is a win in my book. This idea should especially appeal to people who don’t care for having cities step in to regulate payday lenders, since it would reduce barriers to competition and allow for real customer-friendly innovation in a highly non-customer-friendly market. What’s not to like?

The fox has always guarded the henhouse

News item: Rick Perry appointee says something obnoxious and privileged about the people his company fleeces for his fortune.

The official who oversees Texas’ consumer watchdog says payday-loan customers — not the lenders — are responsible when the loans trap them in a cycle of debt.

William J. White says it’s out of line to even question an industry that has had its practices called exploitative by many critics, including the Catholic Church.

White was appointed by Gov. Rick Perry to chair the state agency that oversees the Office of the Consumer Credit Commissioner, which is responsible for protecting consumers from predatory lending practices.

White also is vice president of Cash America, a major payday lender that the new U.S. Consumer Financial Protection Bureau last month socked with its first sanctions for abusive practices.

White didn’t return calls earlier this month for a story about his dual roles as payday lender and consumer defender. But, on Dec. 12, as the Finance Commission wrapped up its monthly meeting in Austin, he agreed to answer a few questions.

“What you’re doing is totally out of line,” White said, as the interview wound down. “This fox-in-the-henhouse stuff is totally political.”

His company and others in the industry have been accused of making payday loans to desperate people in amounts they can’t afford to repay. Customers become trapped in a cycle in which all of their disposable income — and some non-disposable income — goes to payday lenders, critics say.

Former El Paso city Rep. Susie Byrd spearheaded a payday-lending ordinance early this year that is on hold until the city council debates it on Jan. 7.

White was asked to respond to Byrd’s claim that payday lenders in Texas profit by making people poor.

“That’s really is not worth responding to,” White said. “People make decisions. There’s nobody out there that forces anybody to take any kind of loan. People are responsible for their decisions, just like in my life and in your life. When I make a wrong decision, I pay the consequences.”

Ha ha ha ha ha. Dude, you’re rich and politically connected. You don’t pay consequences for anything. You have people for that.

Anyway. Sen. Wendy Davis took exception to White’s offensive remarks.

Democratic governor contender Wendy Davis is calling on William J. White to step down as chairman of the Finance Commission of Texas for saying people who take out payday loans are responsible for their own situations.

White, vice president of Cash America, should be an advocate for consumers on the state board but instead makes excuses for his own predatory industry, Davis said.

“William White can’t protect Texas consumers while he represents a predatory lending company on the side,” she said.

That’s a feature, not a bug. I’ll get back to that point in a minute. In the meantime, Lisa Falkenberg presses the point.

In April 2012, [White] signed the commission’s resolution complaining of the “complexity” and “confusion” of local payday regulations. He asked the Legislature “to more clearly articulate its intent for uniform laws and rules to govern credit access businesses in Texas.”

In other words, he asked lawmakers to bigfoot (or, pre-empt) local protections, forcing cities to conform to the state’s do-nothing regulation.


“There’s nobody out there that forces anybody to take any kind of loan. People are responsible for their decisions … ,” White told the Times reporter. “When I make a wrong decision, I pay the consequences.”

There’s nobody out there who makes you buy gas after a hurricane, either, or book a hotel room because your flood-prone house flooded. Yet the state, through Texas Attorney General Greg Abbott, still protects people against price gouging and profiteering on misery after such an event. I guess the misery of the working poor is another matter.


Earlier this week, Democratic gubernatorial candidate and state Sen. Wendy Davis, of Fort Worth, declared White’s comments a “blatant conflict of interest,” and called on Perry to remove White from the state post.

Perry – no surprises here – isn’t budging. And what from Abbott, the Republican candidate hoping to succeed Perry? As of deadline Tuesday, silence.

The attorney general’s spokesman didn’t respond to a phone message or to a list of questions asking, among other things, whether he would have appointed a payday loan executive to watch over the payday loan industry. Abbott himself has taken more than $21,000 from Cash America’s PAC, according to campaign finance records. He also has promised a fresh perspective and transparency in government.

Here’s a chance to prove it. Abbott should follow Davis’ lead and call for White’s ouster, condemn the commissioner’s comments and show he’s prepared to lead differently, to cast aside old ways, and to replace cronies with competent, fair appointees.

Oh, Lisa. You’re such a kidder. Of course Greg Abbott will never do this. In fact, he’s already defending White. (Sen. Sylvia Garcia, on the other hand, is with Wendy.) Hell, the only reason he goes after gasoline price gougers is because they directly affect everyone, including suburban Republican voters, who scream bloody murder when it happens. The people whose lives are being wrecked by payday lenders don’t have voices that Greg Abbott hears. To him, that’s just the free market. And if it has to be regulated at all, best to have someone at the helm that really, truly understands the needs of the businesses that are being regulated. Anyone besides me remember the Texas Residential Construction Commission, or TRCC? Remember who Rick Perry appointed to be the first head of that commission? Here, let’s take a stroll down memory lane.

Consider how the Residential Construction Commission came to be created and how it was appointed.

According to a report released earlier this year by public advocacy groups, Texas homebuilders donated $5 million to executive and legislative candidates, political parties and political action committees during the 2002 election cycle, which completed the Republican takeover of the statehouse.

Houston homebuilder Bob Perry, a major contributor to Gov. Rick Perry and Republican causes, gave $3.7 million of the total.

Bob Perry (who isn’t related to the governor but obviously shares his political philosophy) and other homebuilders were a driving force behind creation of the new commission. The new law established some construction and warranty standards for the new agency to regulate, but its primary purpose was to offer homebuilders protection against lawsuits brought by unhappy customers.

Homeowners now have to go through an expensive, commission-run dispute resolution process before pursuing any legal action over construction complaints. This is more bureaucratic and potentially more intimidating than the mandatory arbitration process that most builders already required in new home contracts.

The law also limits the damages that homeowners can recover, and the makeup of the commission has consumers justifiably concerned.

The law requires four of the nine commissioners to represent builders. State regulatory boards typically include some members of the industries being regulated.

The argument is that technical, industry input is necessary for effective regulation, but the fox-and-henhouse practice also is a testament to the lobby’s influence.

Two of the “public” members appointed to the Residential Construction Commission by the governor also have strong ties to the homebuilding industry. And, even more troubling for consumers, one of the industry representatives, John Krugh, an executive of Bob Perry’s homebuilding company, was appointed to the commission by Rick Perry less than a month after the governor had received a $100,000 political donation from Bob Perry.

The governor’s office denied any connection between the contribution and the appointment, but skeptical consumers should be forgiven.

The TRCC was such a crony-tastic debacle that it finally got sunsetted in 2009. But the philosophy is ever with us. William White is just John Krugh in another context. Same story, different chapter. And it’s always been fine by Greg Abbott. If Greg Abbott had ever had an inkling to put the interest of consumers over the interest of business, he’d have shown it before now. If you want that to happen, you don’t want Greg Abbott as Governor, because he’ll keep doing what he and Rick Perry have always done. It’s nothing new, and it’s not a secret.

What we missed by not getting a payday lending bill

Better Texas Blog reminds us of what could have been

SB 1247, the omnibus reform bill filed by Sen. John Carona … included the ability to repay standards, loan limits, and refinance limitations, among numerous other provisions. According to the Office of Consumer Credit Commissioner (OCCC), the refinance limitations alone in SB 1247 would have produced annual savings more than $130 million for more than 300,000 Texas consumers.

Unlike other consumer loan products offered in Texas, the Finance Code contains no payday loan regulation relating to loan fees or effective annual interest rates, loan amounts, maximum number of refinances per loan, loan terms[i], ability to repay or underwriting and type of product. At least for payday loans, the absence of any statewide regulation or consumer protection makes Texas an outlier compared to nearly every state that permits or authorizes payday lending. Only five other states do not cap the amount of fees payday lenders can charge (Delaware, Idaho, Nevada, Ohio and South Dakota).[ii] Even among these states however, Delaware and Nevada have limits on loan terms and all five states limit loan amounts. [iii]

recent analysis of payday lending conducted by the Consumer Financial Protection Bureau (CFPB), which covers a majority of the U.S. storefront payday loan transactions over a 12-month period, found that 68 percent of payday loan consumers had annual incomes at or below $30,000, and 43 percent had annual incomes at or below $20,000. The median annual income of payday loan consumers was about $22,500; for borrowers making under $20,000, the most common income sources were “public assistance/benefits” and “retirement”.

The CFPB analysis also found that the average payday loan amount nationwide was $392 in 2012. Nationwide data on payday lending appear to be much better than comparable data from unregulated Texas payday lenders, which reveal that Texas borrowers pay much higher fees and loan amounts. Based on 2012 data from OCCC, the average single payment payday loan in Texas was $472.

SB 1247 also included limits on refinances for each loan product, generating a pathway out of debt for consumers who get into trouble with payday or auto title loans. For 2012, single payment payday loans alone comprised about 75 percent of all payday loans, while single payment auto title loans accounted for 83% of all auto title loans.[iv] The original loan amounts of single payment payday loans surpassed $1 billion, while loan refinancing nearly hit $2.1 billion. Over 70 percent of single payment payday loan consumers that refinanced their loan did so multiple times. As shown by the CFPB report, repeat borrowing and renewals represent the lion’s share of all loan volume.   On-time repayment is the exception, with three refinances for every loan paid in full on the original due date.

The good news and the bad news is that city ordinances are still in effect. It’s good news because we almost got an bill that did little more than nullify the city ordinances, and it’s bad because city ordinances only cover a portion of the state. Given what Mayor Parker has said, we will likely be able to add Houston to the list of cities that offer this protection. But until we have a real statewide law, it only means so much.

I’ll continue to demonize the payday lending industry, thanks

Lawrence Meyers, a shill for the payday lending industry, has a sad.

[Loren] Steffy claims in his blog post (“Will lawmakers finally rein in paydayl lenders,” that PDLs are “inherently predatory,” yet a loan cannot be predatory if choices exist, and a person enters into a transaction via free will, with terms and pricing disclosed. Steffy’s inference that borrowers do not “understand the consequences of the terms to which they’re agreeing” indicates he has never taken out such a loan nor visited a store that offers such loans. It is too common for people like him to make unfair pronouncements without the experience to draw upon.

Here’s Steffy’s blog post. If you think it’s unfair because Steffy hasn’t taken out a payday loan himself, then go read Forrest Wilder’s account of taking out a payday loan. Be sure to read carefully the bits in which Wilder describes the obfuscatory language used to describe the loan’s terms, despite the laws that Meyers touts that are supposed to provide borrowers with accurate information. What do you have to say about that experience?

Regarding allegations of very high average percentage rates, borrowers don’t care about APR because loans are not taken out for a year. Customers care about the loan’s flat fee, just like any other product. When you get dinged for a $2 automatic teller machine fee for a $200 withdrawal, do you scream about the APR? No, you scream about the two bucks.

Meyers is counting on people’s innumeracy here in waving off concerns about APR. We use APR to provide a consistent basis for comparison, since payday loans by their nature are short term, as noted. You can say that the rate for a loan that’s due in a week and for which you owe $20 on top of $100 in principal is twenty percent, but the APR for a loan if 20% interest accrued weekly would be 1040%. It’s not a trivial difference, and it’s not at all a mystery why people like Meyers would like to gloss it over.

Consumers have choices, and in the first half of this year, the Office of Consumer Credit Commissioner reported that 800,000 consumers freely chose PDLs over the following loans (the cost for $100 for 2 weeks):

Borrow from a friend or an employer ($0)

Credit card advance ($1)

Installment loan ($3 to $8)

Pawnbroker ($9)

Title loan ($10 to $12)

PDL ($15 to $23)

Online PDL ($25 to $30)

Bank overdraft fees ($40)

Loan shark (no maximum)

While I question how freely some of these choices were made, I do agree with Meyers on one point: Bank fees are too high, and have been for a long time. I have great hope that the Consumer Financial Protection Bureau will take steps to deal with that. Of course, the CFPB is also taking a look at payday lenders, so perhaps that isn’t what Meyers was looking for here.

Simply put, it costs a lot more to get a payday loan in Texas than it does in other states, where there is regulation of the industry. Given that it’s highly unlikely that Texas payday lenders have significantly higher costs of doing business than their counterparts elsewhere, the obvious conclusion is that they’re charging too much. If all goes well, the Lege will deal with that next spring.

The CFPB and payday lending

This ought to be good.

Picking his first public fight with the banking industry, Washington’s top consumer cop, Richard Cordray, promised on Thursday that his examiners will scrutinize a handful of big banks that make high-cost loans. Inspection of major financial institutions will be part of a broader review of payday lenders, he said at a public hearing organized by the Consumer Financial Protection Bureau in Birmingham, Ala.

The move is significant in that Cordray made no distinction between established financial institutions, including Wells Fargo and U.S. Bank, and less-respectable storefront and online payday lenders with names like EZ Money and AmeriCash Advance, widely criticized for making high-cost, short-term loans to the most desperate borrowers.

Although he was careful not to strike a directly confrontational tone, by specifically mentioning banks’ high-cost loans in his first major speech as the new CFPB chief, Cordray suggested that his agency doesn’t buy the bank industry line that its loans are not traditional payday products because they are structured differently.

Cordray did not single out any bank. But the listing of specific names of such payday lending programs in an examination guide released at the hearing — such as Fifth Third Bank’s “early access advance” — is likely to chill the blood of bank executives, whose companies make big profits off payday loans.

“We recognize the need for emergency credit,” Cordray said in a transcript of his opening remarks, provided in advance. “At the same time, it is important that these products actually help consumers, rather than harm them.”

I have a copy of his remarks beneath the fold. I note this story for two reasons. One, of course, is because I believe this sort of scrutiny is long overdue. While there is certainly a need for short-term emergency credit, you don’t have to do a lot of research on this topic to see that an awful lot of payday lending is designed to take advantage of people who are not very sophisticated about finances, most of whom are poor. It’s a huge transfer of wealth away from those who have the least, which is why many religious leaders and organizations are involved in this fight, to their credit. Often, churches are left to clean up the mess that this causes for their members. Putting a stop to the worst practices and arming people with the information they need to make better choices will make a big difference.

The other reason is that the state of Texas finally took action on payday lending last year, with those new laws taking effect this month. Stronger legislation than what eventually passed was championed by none other than Rep. Tom Craddick, who is no one’s idea of a business opponent. It’s too early to say what effect the state’s new laws will have, and it’s too early to say what direction the CFPB will take, but it’s not hard to imagine the feds being more aggressive than the state was. If so, how will the politics of that play out? There is clearly bipartisan support for more oversight on this industry. Will the federal versus state issue get in the way?

Anyway. The CFPB’s field guide for examiners is here, and there’s more on the CFPB website. Let’s remember what this is all about:

Traditional payday lenders say the high cost of their loans is justified because the risk of default is also high. At those lenders, where average annual interest rates on borrowing top 400 percent, customers leave behind a post-dated check for the amount borrowed, plus a fee.

Bank payday loans, also described as direct deposit advance products, work differently. Customers must have checking accounts and must have their pay or benefits check directly deposited into that account. When the check is deposited — the maximum loan term is 30 days; the maximum loan usually $500 — the bank pays itself what it is owed, plus the fee. If direct deposits are not sufficient to repay the loan within 35 days, the bank repays itself anyway, even if the repayment overdraws the customer’s account, triggering more fees.

For some borrowers, there are much cheaper forms of short-term credit. Members of State Employees’ Credit Union in North Carolina, for example, can take out a payday loan at 12 percent interest. Further, they are required to sock away 5 percent of what they borrow in a savings account. When that balance tops $500, they can borrow money for even less — just 5.5 percent.

Payday loans are still the most profitable loans the credit union makes, said Jim Blaine, president of the company. Blaine said that the credit union earns a 4 percent return on the average loan.

More than 110,000 members participate in the program, with as many as 90,000 taking loans on a recurring monthly basis. They have put away $23 million collectively through the mandatory savings program, according to the credit union’s data.

Blaine said he didn’t want to comment directly on bank payday lending, but noted, “It sometimes seems like our financial system is set up to penalize those who know the least and have the least.”

He added, “It appears to me that the system has gone beyond buyer beware to buyer be damned.”

Indeed it has. This is why the CFPB was created.


Payday lenders face new regulation

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.

In which I try to find common ground with Sen. Patrick

From a news item about President Obama’s nomination to helm the Consumer Financial Protection Bureau:

Congress created the bureau a year ago this week with the enactment of the Dodd-Frank law, which overhauled financial regulations after the credit crisis. The bureau, a centerpiece of the sweeping new law, has since emerged as one of the thorniest topics in Washington and on Wall Street.

Putting a director in place is critical because the agency will not gain the full measure of its powers until the Senate confirms a nominee. The agency can supervise the compliance of banks with existing laws, but the Dodd-Frank financial legislation dictates that it cannot write new rules or supervise other financial companies without a director.


Republicans made it clear on Sunday that they were no more likely to confirm Mr. Cordray than Ms. Warren. Forty-four Republican senators have signed a letter saying they would refuse to vote on any nominee to lead the bureau, demanding instead that the agency replace a single leader with a board of directors.

One of the things my new pal Sen. Dan Patrick and I talked about on that recent Houston8 episode was the Texas Senate’s two thirds rule. He’s against it, in case you hadn’t heard, and he talked at some length about how much more the Senate was able to do in the special session when the two thirds rule was not in effect. I’m certain, therefore, that Sen. Patrick will join me in condemning this obstructive tactic by a minority of Senators in Washington, and call on them to reform their rules so the majority party can do what it was elected to do. If it’s good enough for Austin, it’s good enough for DC. Right, Dan?