As of early April 2009, the Texas Legislature and the U.S. Congress are both considering legislation to regulate payday lenders. Last week, state senators announced pending bills that would establish oversight of the largely unregulated payday loan industry. The proposals include licensing requirements, a 36% limit on interest rates charged on payday loans, a limit to fees, and oversight of collection practices.
At last week’s news conference, Wendy Davis, D-Fort Worth, stated, “It is high time we put an end to the obscene profits that they are making off of our families who are just trying to make ends meet.” Davis is the sponsor of Senate Bill 2131, which intends to regulate credit service organizations (“CSOs”) that make payday loans. The Senate bill would place CSOs under the authority of the Texas Consumer Credit Commissioner, who would license the lenders, impose fee restrictions, and oversee debt collection practices.
Payday loans are small, short-term loans that are structured as advances on the borrower’s next paycheck. The borrower pays a fee and writes a post-dated check that the company agrees not to cash until the borrower’s payday. The normal fee for that service is equal to an annual interest rate of around 400%, although fees in excess of 1,100% are not uncommon.
Frequently, the borrower cannot afford to repay the loan out of their next paycheck, and the loan is either “renewed” for additional fees, or the post-dated check is dishonored when it is presented to the bank. Payday lenders have been accused of using illegal and abusive debt collection practices when attempting to collect funds to cover the dishonored checks.
Texas ranks fourth nationally in the number of payday lenders, and several Texas cities (including Fort Worth, El Paso, and San Antonio) have more businesses offering payday loans, check cashing, and pawn loans than they have bank and credit union branches. Fort Worth-based Cash America, the nation’s largest operator of pawnshops, has hired lobbyists and started a political action committee that gave more than $170,000 to national candidates in the run-up to the 2008 elections.
Rep. Luis Gutierrez, D-Ill., has sponsored a bill in Congress that would regulate the payday loan industry and provide crucial protections for borrowers. Gutierrez is the top Democrat on the Financial Services subcommittee, which is in charge of consumer credit issues. Although he originally wanted to ban the payday loan industry entirely, he says his bill is the best deal he could manage in the face of the industry’s aggressive lobbying. “While they may not be JPMorgan, Chase, or Bank of America, they’re very powerful,” he said.
Advocates of payday lending defend their practices, saying that the loans are very economical compared to the cost of several bounced checks, and that they are the only quick-credit option for many low-income and moderate-income people. Critics contend that the loans are inherently abusive products that trap borrowers in a devastating cycle of debt.
It’s good to see lawmakers standing up for people and trying to do what’s right. However, they have to tread carefully here because although it sounds like a good idea, it might actually hurt the state and people in it more than help them. The reason is that Texas is a large consumer of short term loans, which means that they people in the state are demanding them and increasing the supply. If they regulate this industry to the point where the lenders are not making a good profit, they will leave or close. What will that do to the many people that are needing these loans to make bills, buy food, do emergency repairs, and more? They will end up not paying bills, not spending money, which will slow the state’s economy even more, not to mention that it will put more people out of work and possibly further the need for these loans. I’m not saying that there shouldn’t be some regulation, as there should be, but they have to be careful here and not over do it in the name of justice and trying to knock a company for making a profit.