February 14, 2013
City lists rules for payday lenders but wants lawmakers to act
Houston officials laid out proposed restrictions on payday and auto title lenders Tuesday, drawing tepid support from the industry and disappointment from advocates who say the rules would not stop the spiral of debt for many low-income borrowers.
The Texas Legislature discussed regulating payday lending in 2011, but met stiff industry resistance and made little progress. Since then, Dallas, Austin, San Antonio and El Paso have adopted regulations. Dallas and Austin have been sued over their restrictions.
Houston leaders say they will wait to see whether the Legislature acts during its current session before voting on their proposal. Mayor Annise Parker has said the industry "cries out for regulation" and called the state's failure to do so "disgraceful."
"Restrictive regulation is needed to curtail the abusive practices that can be found within the industry, and to reduce the cycle of debt that is imposed on the economically disadvantaged," City Attorney David Feldman said. "On the other hand, it needs to be recognized that payday loans are often the only source of credit that these very same consumers have access to. Overly restrictive regulations can reduce the availability of the source of credit for those who need it the most."
Payday lending involves small loans made on a short-term basis that avoid legal caps on fees and interest that apply to mainstream lenders such as banks, Feldman said. Title loans operate similarly and are secured by the borrower's car title, leaving the vehicle at risk for repossession.
Texas' average payday loan of $300, if refinanced or "rolled over" nine times, would see the borrower pay $840 on the $300 principal, Feldman said. In the 10-county Houston region - home to about a fourth of the state's 3,400 such lenders - data show borrowers refinance more often and pay on time less often than state averages. Statewide, 40 percent of borrowers roll their loans over at least five times, Feldman said.
Northeast Houston resident Evelyn Hatchett said she has paid $4,000 on a title loan of $1,500 and still had her car repossessed last fall.
"You're just giving them free money," she said. "It's all just fees. It doesn't touch the principal amount."
Capping the loans
Houston's proposal would cap payday loans at 35 percent of the borrower's gross monthly income for single-payment deals, which are intended to be paid back in a lump sum.
For multiple-payment loans, each installment would be capped at 25 percent of the borrower's monthly income. Auto title loans could not exceed 6 percent of the borrower's gross annual income or 70 percent of the car's value, whichever is less.
The city's proposal also would bar refinancing of multiple-payment loans. Single-payment payday loans could be refinanced no more than four times, and no more than six times for title loans. If a borrower cannot pay after the rollover maximum is reached, he must be offered a no-interest, no-fee payment plan with at least four installments.
Lenders won't object
Rob Norcross, of the Consumer Service Alliance of Texas, which represents all but 150 of the state's 3,400 licensed payday and title lenders, said Houston's proposed ordinance "is not perfect, but it's a significant step in the right direction." The group has agreed not to sue if the city adopts its ordinance largely as drafted, he said.
Consumer groups said the proposal is focused on what the industry could stomach, not what is best for the community.
They prefer the ordinance adopted by Dallas and other cities, which sets lower caps than the Houston proposal on the amount consumers can borrow, allows the plans to be refinanced fewer times, caps the number of installments that can be offered in multiple-payment deals, and requires the principal loan amount to be reduced by 25 percent with each refinancing or, on a multiple-payment deal, with each installment.
Not 'real change'
Allowing unlimited installments on multiple-payment deals, as the Houston draft does, is particularly problematic, said Texas Appleseed policy analyst Ann Baddour, since one such deal can contain the fees associated with 10 to 12 rollovers of a typical single-payment deal.
"The payday lenders are not likely to sue on this ordinance because it really doesn't hurt very much," said Mark Wawro, a Texas Appleseed board member. "It doesn't address the cycle of debt. We want to see real change."
Feldman said he prefers the Dallas model but said the industry's lobbying effort makes it unlikely to pass the Legislature, adding the Houston compromise could serve as a template. More stringent rules would not only invite a lawsuit, he added, but also could force lenders into unincorporated Harris County, defeating the rules' purpose and hurting low-income borrowers' access to credit.
Council members had varying reactions to Tuesday's testimony. Councilman Jerry Davis repeatedly asked whether regulation would impair his constituents' ability to borrow. Others were concerned the city would lack trained staff to enforce the rules.
State Sen. John Carona, R-Dallas, pushed for greater regulation in 2011. Carona's Business and Commerce Committee director, Steven Polunsky, said the fact that Houston's proposal is unique strengthens the case for statewide reform to prevent a patchwork of rules.
Legislators file bills
"It's Senator Carona's feeling that this session there's a lot of impetus behind putting in some strong regulations, some uniform regulations, and some approaches that will address the abuses within the industry and still allow the products to be available for the people who want to take advantage of them," Polunsky said. "The goal is to stop the cycle of debt, and there are a number of routes to that goal."
Carona plans to file a detailed bill to regulate payday and title lending soon, Polunsky said; other payday loan bills already have been filed.
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