Debtors' Treadmill, Part One: Borrowed Time

Preston White's daughter needed a little cash a couple of months ago to relocate her family when she got back from Iraq. “We needed to get them some money really quick,” he said. He tried to get a loan from his regular bank to help the returning U.S. Army veteran, but was denied. So he picked up a phone book, flipped through the pages and saw an ad for a company that guaranteed fast loans. That’s when his "real horror story" started.

Within 30 minutes — just like the ad said — he walked out of The Cash Store in Killeen with $4,000, using his 2003 Chevy Avalanche as collateral. Thirty days later, when the loan came due, White, a 63-year-old retired defense contractor with a business degree, said he realized he had gotten himself in big trouble. “It just happened by accident,” he said. “I was driven by emergency and the rapidity of being able to get this loan.”

White is one of about 220 Texas consumers since 2005 who complained to the state's Office of Consumer Credit Commissioner about small-dollar lenders like The Cash Store, which are known as credit service organizations. They alleged that the lenders had charged interest and fees exceeding 500 percent, had threatened to have them arrested, and had even repossessed their vehicles.

The OCCC told White — and about 160 other unlucky borrowers — that they could do nothing to help. A database that the OCCC uses to track complaints and the agency’s response to them indicates that most consumers are advised to instead contact the Texas attorney general or the Federal Trade Commission.

Texans who get caught in a cycle of high-interest, short-term loans shouldn't be surprised that they get no help from the state. The industry has been unregulated in Texas since 2005. Consumer advocates and some lawmakers maintain that allows companies to charge exorbitant interest and fees that trap poor Texans on a treadmill of debt. Payday and auto-title lenders like The Cash Store, Cash America and Ace Cash Express have argued in the past that they provide a critical service many Texans need and can get nowhere else. (Those lenders and several lobbyists who represent the industry did not return calls requesting comment for this story.)

On its Web site, the OCCC says its mission is to “regulate the credit industry and educate consumers and creditors, thereby producing a fair, lawful, and healthy credit environment for social and economic prosperity in Texas.” The agency regulates auto lending, home improvement loans and manufactured housing. Until 2005, the OCCC also regulated payday loans. That year, short-term lenders began using a new business model, registering as credit service organizations, or CSOs, to avoid state usury laws. CSOs are not licensed or regulated by the state. They are only required to pay an annual fee of $100 to the Texas Secretary of State, which says that more than 3,500 businesses are registered as CSOs. Because they are not allowed to lend money directly to consumers, they use a third-party broker, and they skirt usury laws that prevent exorbitant interest rates by instead charging huge and unregulated service fees.

When Preston White went back into The Cash Store to make a payment on his loan, he was told he could either pay it back in full, with interest — more than $5,000 in total — or pay a fee of $1,300 to roll over the loan for another month. It occurred to him then that he could continue paying $1,300 a month to roll over his loan and never pay off the original debt. And the company threatened to take his truck if he didn't pay up. “That’s when I realized I had stepped in a really big hole here,” White said.

He called the OCCC looking for help. The agency told him that he could register a public complaint, but that they had no ability to help him out of the situation. “Until the Legislature gives us some authority, there’s not much we can do,” said Gary Meissner, manager of consumer assistance at the OCCC. Next, White contacted Texas Attorney General Greg Abbott’s office, pleading for help. He received a form letter that promised no relief. The AG hasn’t taken action against any short-term lender since 2005 and doesn't get many complaints, said spokesman Tom Kelley. There were only 28 complaints filed in the last two years against the ten Texas companies with the most locations, he said.

When it comes to short-term, high-interest loans, Texas is the “wild, wild West,” said Ann Baddour, senior policy analyst at Texas Appleseed, an advocacy group for low-income Texans. There are no limits on the fees the companies can charge, and no restrictions on how the companies attempt to collect their debts. Lenders make millions off the charges that pile up as consumers, unable to keep up with the growing costs, repeatedly renew the loans, incurring still more charges. “It starts out as an emergency and ends up being a debt trap,” she said.

The companies often use aggressive tactics to go after unpaid loans. In complaints to the OCCC, consumers reported that companies threatened to repossess vehicles, have people sent to jail and even harassed their employers. A school employee who filed a complaint told the OCCC the lender “called her principal insulting and vulgar names and said they would keep calling no matter what.”

Because Texas does not regulate CSOs, it’s impossible to know how many short-term, high-interest loans exist or how much consumers spend rolling those loans over. In 2008, Appleseed surveyed 5,000 low- and middle-income Texas families about payday loans. Nearly one in 10 borrowed monthly. More than half of the borrowers extended the loans at least once before paying them off, and a quarter extended the loans multiple times. “There’s literally people spending their entire payday going from lender to lender to put a little down to keep the loan going,” Baddour said.

Preston White, at least, escaped. Through his church and a credit union, he secured a lower-interest loan, paid off The Cash Store and got back the title to his truck. The experience left him appalled at the lack of regulation, and he is lobbying his local lawmakers to stop lenders from abusing consumers. “I don’t know why the state of Texas is permitting this to happen,” he said.