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Payday Lending in the 82nd Legislative Session
In the 82nd Legislative Session, the legislators recognized the need for payday lending reform. Payday loans are small, short-term loans made by lenders at extremely high interest rates. Typically, a borrower writes a personal check for $100-$300, plus a fee, payable to the lender. The lender agrees hold onto the check until the borrower's next payday, usually two weeks later, only then will the check be deposited. In return, the borrower gets cash immediately. The fees for payday loans are extremely high: up to $20 for every $100 borrowed. The interest rates for such transactions can be as high as 500% for a two-week loan.
People who have difficulty paying back these loans can rollover the loan by writing a new check that adds on the same fee. While these loans are supposed to be used on an emergency basis, the average customer makes eleven transactions a year, creating cycles of debt. These predatory loan operators entice desperate customers with the promise of “easy credit” only to pull them into a cycle of debt that drains money away from basic family necessities and from the local economy.
Payday lending traps 12 million Americans in a cycle of debt each year. These small-dollar loans, marketed as short-term transactions, generate $4.2 billion in predatory fees annually. In Texas, there are currently no limits on the amount of fees that payday lenders can charge, and it is common for the fees charged to be the equivalent of 500% APR. An average payday borrower in Texas pays $840 for a $300 loan.
The Texas Legislature passed two bills that license payday lenders, create quarterly reporting, and provide disclosure to customers. Before 2011, payday lenders operated in a loophole in the Texas Constitution that allowed them to operate unregulated and unlicensed.
A coalition of consumer interest groups and faith based organizations like Texas Impact, Texas Baptist Christian Life Commission, and the Texas Catholic Conference formed during the 2011 Texas Legislative Session to regulate the practice of payday lending.
Due to strong advocacy, the Texas Legislature passed two bills, requiring the Texas Finance Commission to implement reporting and disclosure rules. Consumers will now receive a form when they apply for a loan which calculates the total amount they will have to pay if the loan is repaid in two weeks, one month, two months, or three months. The form compares other loan options like credit cards, signature loans, and pawn loans, showing how payday loans carry much higher average annual percentage rates and fees.
The reporting rules allow the state to collect information about payday lenders that was previously unavailable, and which can be used in the future to expose the extent to which Texans are affected by payday loans. Payday lenders do not qualify as “credit service organizations,” and therefore face less stringent regulation than banks and credit unions, if the same parties both organize and provide the funding for the loans. The new reporting requirements will keep payday lenders accountable to the state by requiring the names of all parties organizing and funding loans to be disclosed.
The third and most important bill that would have protected consumers from payday lending unfortunately did not pass. HB 2593 would have limited the number of times that fees can be charged and would have required the payday lenders to accept partial payments to the loan principal. This legislation would have taken a critical step towards ending the cycle of debt for many Texans.
Importantly, a few cities including Austin and Dallas have passed ordinances that include consumer protections similar to HB 2593, and there is hope that several other cities may enact similar ordinances within the next two years.