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Consumer Service Alliance of Texas

Houston’s payday lending ordinance is now in place

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.

Payday lending prospects look grim in the House

From the Observer:

Late into the night on Monday, the payday loan industry strutted its stuff before a very friendly House committee. The hearing came just a week after the Senate passed a surprisingly tough bill that the industry insists would shut down most of Texas’ 3,400 payday and auto-title storefronts. Even though the legislation aired last night is a faint shadow of the Senate bill, it got a rough treatment from six of the seven committee members.

Only the chairman and author of the bill, Rep. Mike Villarreal (D-San Antonio) evidenced any interest in cracking down on the industry.

“I think the tone of the committee was that clearly there was no support for what Villarreal put out there, at least right now,” said Ann Baddour of Texas Appleseed.

What happens next is anyone’s guess but it is possible that payday reform is dead for the session.

[…]

Villarreal’s bill is considered by consumer groups to be a minimalist reform effort. The Senate version would close a loophole that allows payday and title lenders to get around Texas’ anti-usury laws and charge unlimited rates. Instead it would impose a strict 36 percent APR cap on loans, effectively scuttling the business model in Texas. The Villarreal proposal, which focuses on limiting the number of “rollovers” and imposes modest limits on the size of loans based on borrower income, has only received tepid support from consumer groups.

The wording here is a little confusing. Rep. Villarreal has his own bill, HB2706, which was heard in committee on April 22 and which is pending in committee. I believe this bill is similar to the pre-amendment version of Sen. Carona bill, which is SB1247. That now-tougher bill, which passed the Senate last week, is what Rep. Villarreal brought up in committee this Monday. Rep. Villarreal is the chair of the Investments & Financial Services committee, but only one other member of the committee is a Democrat, and two of the Republicans are quoted in the story giving rhetorical foot massages to the payday lenders and the curious notion that their lightly regulated existence is necessary for truth, justice, and the American way. As the man said, you don’t need to be a weatherman to know which way the wind blows.

What happens next is impossible to predict but billions in revenues hang in the balance.

Daniel Freehan, the CEO of Cash America International, acknowledged as much on a conference call with analysts last week.

“Dozens of different scenarios could unfold at this point that run the gamut of this bill never getting out of the House committee, to a bill that passes the House in identical form of Senate Bill 1247. In between these two extremes are multiple permutations that could develop, and it’s impossible to predict how this may unfold with any reasonable degree of confidence.”

A worst-case scenario from the point of view of the reformers is legislation that would strike down city ordinances but not add any new statewide regulations. One such pre-emption only bill, House Bill 2953 by Rep. Ryan Guillen (D-Rio Grande City), is already headed to the House floor.

Last night, Rob Norcross of the Consumer Services Alliance of Texas, a group that represents 80 percent of all the payday and title storefronts in Texas, tried to play down the pre-emption issue, saying that he believed the industry would prevail in its court. But there’s no doubt that ordinances passed in Austin, Dallas, San Antonio, El Paso and Denton are cutting into profits. In January, Mark Kuchenrithe, the CFO of Austin-based EZCorp, told analysts that the company’s “profitability… was negatively impacted by over $1 million” during the last quarter of 2012 “as a result of ordinances enacted in Dallas and Austin.”

Here’s HB2953. Far better that nothing passes than this does. I’m okay with rolling the dice in the courts if it comes down to it. BOR has more.

UPDATE: The Trib adds on.

Lege gets set to tackle payday lending

The good news is that the Lege is ready to tackle legislation dealing with the scourge of payday lenders. The bad news can be summarized by the following remarks in this Chron story.

This week, State Rep. Vicki Truitt, R-Keller, will ask the Texas House to approve a package of three bills written as part of the extraordinary compromise efforts.

Truitt, who chairs the Texas House committee overseeing the issue, summoned mediators from the University of Texas School of Law to craft legislation that would induce lobbyists to drop their opposition.

“The status quo is not acceptable,” Truitt said. “I called the industry people together and told them, if you have to have regulation, this is the Legislature to do it in,” referring to the overwhelmingly conservative membership. “With the makeup of the House, now’s a good time. And I am taking control.”

In other words, this is a legislature that’s dominated by people who don’t really care about the poor and will gladly adopt a minimalist bill that the payday lenders’ lobby can live with so that they can quit having to deal with all these annoying advocates. I never thought I’d say this, but Tom Craddick is showing real leadership on this issue:

Normally suspicious of government regulation, a few years ago, Craddick heard the heartrending tale of a Midland housekeeper who took out a payday loan for a family funeral and fell into a quagmire of debt. Each time she failed to pay her debt in full, it was rolled over into a new loan – with costly fees added each time. In seven months, what started as a $5,000 debt grew to more than $10,000.

The incident outraged Craddick, who tried and failed last session to pass a bill regulating the industry. He does not believe Truitt’s bills go far enough.

Operating as “consumer service organizations,” payday and auto title lenders escape regulations on interest rates by charging exorbitant fees. Until that loophole is closed, Craddick said the industry will continue to make 61 percent of its national profits in Texas, the only state with no regulation.

He also has a personal reason for not trusting industry representatives. After he filed his bill last session, he got an offer from the industry: “If I withdrew the bill, they would fly down and pay off that (the housekeeper’s) loan,” Craddick recalled. When the bill failed, Craddick redoubled his commitment.

“It’s awful,” Craddick told a House committee early in the legislative session. Church money given to the poor ends up in the hands of a payday lender when it “could have been used to buy groceries for a family or a toy for a child at Christmas.”

When a guy like Tom Craddick gets it, you wonder what is holding anyone else back. You’d think the issue of making payday lenders operate under the same basic rules as banks would be a no-brainer, but that’s the power of the lobby and a few million bucks.

State Sen. John Carona, R-Dallas, said he is sponsoring Truitt’s bills in the Senate. Sen. Wendy Davis, D-Fort Worth, is advocating stricter legislation, but Corona said he considers Truitt’s legislation an important first step.

“Nobody said these bills are perfect, but they absolutely are better,” he said. “It is a modest first step toward regulating this industry.”

No, subjecting them to the same rules about lending money as banks would be a modest first step. What Rep. Truitt is pushing is inadequate. Sen. Davis’ bill passed out of committee three weeks ago and is on the Senate intent calendar, but likely lacks the votes to come to the floor. Unfortunately, something inadequate is the best we’re going to get. We’re going to need a better legislature before we can do a better job of this.

Payday lending bills advance

Good.

Legislation by Sen. Wendy Davis of Fort Worth that would cap fees and interest on loans made by payday and car title lenders was approved Thursday by the Senate Business and Commerce Committee.

The bill, which now heads to the full Senate, has strong support from a coalition of consumer and faith-based groups, who are calling for tougher regulations on the lenders. The Consumer Service Alliance of Texas, which represents lenders, opposes the proposed caps.

[…]

Other related measures are pending in the House. Rep. Vicki Truitt, R-Keller, chairwoman of the House Pensions, Investments and Financial Services Committee, has introduced a package of three bills that would add regulations, including disclosure requirements, but would not cap fees. Rep. Tom Craddick, R-Midland, is sponsoring more stringent legislation similar to that proposed by Davis and [Se. Royce] West.

The senators’ bill would place payday and car title lenders under the same regulatory framework that governs banks and credit unions.

The bill would impose a 15 percent rate cap on fees for payday loans. It would also limit the size of the loan to 35 percent of a borrower’s gross monthly income up to a maximum of $1,240.

For auto title loans, the bill creates a tiered rate system depending on the size of the loan. Loans of up to $700 would be capped at 20 percent and the next $700 would be capped at 18 percent. Loans over $1,400 would be capped at 15 percent.

The bill would also limit the number of loan rollovers and require lenders to accept partial repayment of the principal to help keep consumers from a worsening pattern of debt. Lenders would be required to offer a repayment plan on a customers’ third consecutive loan renewal.

The Davis/West bill is SB1862. Of the other payday lending legislation that I’ve blogged about, all are still pending in committee except for Rep. Truitt’s bills, HBs 2592 and 2594, which as noted are less stringent than the other bills. Truitt’s position is in line with the payday lenders’, in that she doesn’t favor the caps or limits that other bills include. We’ll see what happens in the House to SB1862 if it passes the Senate. A statement from Sen. Davis is here.

It’s way past time to regulate payday lenders

From the Observer:

As an industry, when you’ve got Tom Craddick, consumer groups, the Midland County District Attorney and Bible-quoting Baptists arrayed against you, most likely you’re facing a serious come-to-Jesus moment. Today, a House committee heard hours of impassioned testimony in favor of legislation that would curb Texas’ Wild West payday and auto-title lending business. As Melissa del Bosque has documented, payday lenders in Texas are virtually unregulated and frequently lock consumers into a cycle of debt. Craddick’s bill, along with three other identical bills, would close a loopholethat allows payday lenders to register as consumer credit organizations (CSOs) and escape regulation.

It was rather incredible to watch former Speaker Tom Craddick, who doesn’t exactly have a reputation as an advocate for the working poor, take the payday lenders to the woodshed. “No longer do I think the Legislature can stand back and watch these businesses take advantage of people in need,” Craddick said today. The impact of rates that can amount to 500 percent APR is “overwhelming – actually it’s awful,” he said.

Under the proposed legislation, payday and auto-title lenders could no longer operate as consumer credit organizations, but instead would be subject to the same laws and regulations as other lenders. A cap of 135 percent – still far above the 36 percent limit imposed by many states – would be imposed on the short-term loans offered by payday lenders.

Craddick’s bill is HB410, and it has a bipartisan plethora of co-authors. Other bills on the subject are HB 656 (Farias), HB 661 (Rodriguez), HB 1323 (Johnson), HB 2594 (Truitt), and HB 2592 (Truitt).

Among the consumer advocates and faith leaders, consensus seemed to be that the best approach would be imposing rate caps, closing the CSO loophole and imposing existing law on the lenders. That’s Craddick’s approach. However, the payday lender industry is basically telling legislators that they will go out of business if that happens and desperate consumers will have nowhere to go for easy credit.

The Craddick approach would “dramatically change the business model as we know it in a detrimental way,” said Rob Norcross, a lobbyist for the Consumer Service Alliance of Texas, an industry group.

Asked today if they could survive with ‘just’ 135 percent APR, Norcross said, “The answer is no. … Those rates aren’t sustainable.”

Cry me a river, dude. If your business isn’t sustainable at that APR level, you don’t have a viable business model and deserve to be made extinct. If that’s what happens, it’s a feature, not a bug.

Basically, payday lenders need to be treated like any other loan-making financial institution. As the group Texas Faith for Fair Lending notes, the problem is that’s not how they operate now.

payday and auto title lenders do not operate as lenders governed by the Texas Finance code as one might expect. Instead, they have found a loophole in a law called the Credit Services Organizations (CSO) Act that sets no limits on rates and fees they charge borrowers.

The CSO statute was enacted in 1997 and is designed to govern how credit repair services can help those repair bad credit. In this statute CSOs are given is the authority to “obtain an extension of consumer credit for a consumer.” The intent is clearly to enable CSOs to help Texans with bad credit build up a positive lending history in order to increase credit scores. Instead, over 98% of registered CSOs in this state are payday and auto title lenders that do anything but help people repair credit.

So, in practice, payday and auto title lenders are merely brokers, or arrangers of credit. They partner with banks or other large lenders who charge an interest rate of below the 10% APR constitutional limit, while the payday lender, registered as a CSO, charges an exorbitant fee. This diagram better illustrates the relationship –

The true lender, the financial institution, charges a small interest rate and makes a little money from the short loan. The CSO charges a high fee to arrange, collect and guarantee the loan. This is typically around $20 per $100 borrowed but there is no legal limit on these fees. The borrower never interacts with the actual lender.

They add nothing of value to the equation but reap huge profits by virtue of the loophole they squeeze through. That loophole needs to be closed. You can see videos of the TFFL press conference here, and more about TFFL, which is a Texas Impact project, here. If you’re a churchgoer, the odds are good that your denomination is involved in this effort. Please check it out and make your voice heard as well.