For Cynthia Reynosa, a $500 payday loan meant she could help her mother, suffering from rheumatoid arthritis, pay her high insurance deductible. But the interest she paid over the next six months totaled $1,200 — more than twice what she'd borrowed.
"I was thinking I would find the money wherever I would have to find it, so she wouldn't have to suffer anymore," Reynosa testified during a Senate committee hearing today.
If a set of bills filed by Sens. Wendy Davis, D-Fort Worth, and Royce West, D-Dallas, passes this session, consumers like Reynosa who take out short-term, high-interest loans could be protected. Their measures would close a loophole in the state finance code, placing a cap on otherwise exorbitant interest rate charges.
The Office of Consumer Credit Commissioner regulated payday loans until 2005, when lenders changed their business model to credit service organizations, or CSOs. Under the new model, the now unregulated CSOs use third-party lenders to provide fast money to consumers and operate through the loophole. OCCC Commissioner Leslie Pettijohn said her office received 400 payday lending complaints in the last two years.
But Ryan Brannan, a policy analyst with the Texas Public Policy Foundation, said those who take out payday loans are making informed choices and turn to CSOs because other lending organizations turn them down. "We're advocating that the correct role is that the market should determine the winners and losers, not the government regulation," he said.
Other opponents of the bill, like ACE Cash Express President and CEO Jay Shipowitz, worry it will force lenders to close their stores. "We're charging a rate that we think the market will bear based on the competitive environment in Texas," he said.
ACE stores in Oregon continue to remain in business despite an interest rate cap, Davis said. "Our communities are asking us, 'Why in Texas have you allowed these lenders? What's so special about them that they should operate in a loophole outside the lending regulations that all other lenders must follow?'" she said. "Unless and until you [work with me on that], my only alternative is to offer what I'm offering now, which is to put you under existing lending statute in the state of Texas that all other lenders have to function under."
Shipowitz said the Texas stores did offer a loan that fell under the state finance code, but that when the stores' losses were higher than revenue, they discontinued sales.
The bill's advocates and some lawmakers say payday loans charge high interest rates to the poor, trapping them in a cycle of debt. The Dallas City Council unanimously passed a resolution on Feb. 9 that asked for meaningful reform of CSOs. "For the Dallas City Council to agree on anything, that's a big deal," said Councilman Jerry Allen. "There's a groundswell. That groundswell says we can no longer turn our backs for fair lending practices."
Pastor Frederick Haynes of the Dallas-based Friendship West Baptist Church said his community has been oversaturated with 20 payday and auto-title lenders in a five-mile radius in the last few years.
"If someone is drowning, instead of throwing them a life preserver, in too many instances, we have thrown them shackles," Haynes said. "That is what the payday industry has done to too many individuals."