Signs offering promises of “quick cash” can be seen all over Texas. So-called payday lenders offer short-term loans under $700, but those loans have been criticized for interest rates that can climb to 500 percent.
For some customers, taking one on leaves them in a never-ending cycle of debt. It’s controversial, and the practice is actually banned in 12 states.
Recently, it’s become an issue in this year’s governor’s race.
The topic was kicked up after the chairman of the Texas Finance Commission – William White – made comments to the El Paso Times suggesting payday lenders should be able to charge whatever fees they want. Previously unheard of, White’s comments put him in the spotlight among payday loan regulation advocates.
White’s office oversees the Office of the Consumer Credit Commissioner, which is the state’s consumer protection division. But White is also a vice president at Cash America, a payday lender. In a recent campaign email, gubernatorial candidate and state Senator Wendy Davis called on White to resign, saying his dual role is a conflict interest.
Davis says her opponent for governor, Attorney General Greg Abbott, is partly to blame for the rapid growth of the payday lending industry in Texas. She points to a letter written by Abbott’s office in 2006 that clarifies it was legal for payday lenders to operate outside of certain regulatory statutes. It also states that the businesses can, in fact, charge whatever fees and interest rates they want.
Abbott responded to Davis’ allegations by saying the letter is solely a legal opinion and does not reflect his personal stance on the issue. If and how payday lenders are regulated, he said, is a question for the Texas Legislature.
But some state lawmakers say regulating payday lending is unnecessary. One industry-sponsored survey published last month reported 85 percent of respondents understood the risks of payday loans “very well” before they decided to take one on.
“What this survey found is that the majority of borrowers – 95 percent – have a very high value that they pace on the payday loan option,” said Jamie Fuller, a senior vice president of the cash lending company Advance America.
But the survey has been criticized for targeting a shallow pool of respondents. Of the 1,004 respondents, all were customers who had already paid off their loans.
State Representative Mike Villarreal (D-San Antonio) chairs the House Committee on Investments and Financial Services, and he says the survey is not a legitimate indication of the value of payday loan services.
“It’s clear to me that this industry paid for this poll and got what they paid for,” he said. “They only surveyed consumers who took out two-week long loans and paid them off immediately. That is not the typical consumer of payday loans.”
Villarreal filed a bill in the 2013 legislative session that would have put new regulations on payday lenders. He says the centerpiece of the proposed bill was simple: “If you’re going to give out these loans, you have to take into consideration the borrower’s ability to pay the loan back.”
The bill would have limited the number of times a payday lender can refinance the loan as well, as limited the total debt a customer can take on from a lender. But the bill never made it out of committee. So before the next legislative session, Villarreal is looking to improve laws at the city level.
Some Texas cities have started tightening regulations on payday lenders. Austin is one of them. In 2012, the city council passed a zoning ordinance that limits where payday lenders can be located. The city also has regulations dictating how much a borrower is allowed to take on relative to their income.
Martha Hernandez is with Austin’s Credit Access Business Program, and her office monitors the roughly 140 payday lenders operating in Austin.
“The goal of that ordinance is to prevent abusive and predatory lending,” she said. “The city of Austin does not regulate interest rates or anything like that, but rather based on the borrower’s income, the ordinance does specify an amount or percentage of the income.”
Austin’s ordinance requires that cash advances can’t exceed 20 percent of a borrower’s gross monthly income. Rep. Villarreal says most major cities in Texas have passed similar ordinances – but a state law would likely override all of them. Going forward, he says he’s not interested in seeking a statewide ban on payday loans because – if used responsibly and regulated by the state – the loans can be a valuable option during tough times. However, any state regulations will have to wait for the next state legislative session in 2015.