Payday lenders are about to come under the microscope.
New laws aimed at curbing predatory lending take effect this week, meaning payday and auto title loan businesses will have to be licensed by the state and post a schedule of fees in a visible place, similar to the overhead menus seen in fast food restaurants.
Proponents of the new regulations passed by lawmakers during the 2011 session say they're needed because the practice of offering short-term, high-interest loans to consumers has led thousands of Texans into a cycle of debt and dependency. Lawmakers heard horror stories about consumers being charged interest rates in excess of their initial loans.
Absent these regulations, the number of payday loan businesses in Texas has more than doubled, from 1,279 registered sites in 2006 to more than 3,500 in 2010. Opponents say this industry has flourished because of a 1997 law intended to give organizations flexibility to help people repair bad credit. A loophole allowed payday lenders to qualify, giving them the freedom to operate without limits on interest rates.
Though the new laws took effect on Jan. 1, state regulators have been working for months to finalize the language of the rules, and businesses are in the process of coming into compliance. Eventually, lenders will be required to disclose more information to their customers before a loan is made, including the cost of the transaction, how it compares to other types of loans and interest fees if the payment is not paid in full.
Rob Norcross, a spokesman for the Consumer Service Alliance of Texas, which represents the payday and auto title lenders, said his industry welcomes the increased scrutiny, even if it means some businesses may not qualify to remain open.
“You want people to meet certain standards to operate these businesses,” Norcross said. “Having uniformity and transparency in cost disclosure is probably good for competition, which will be good for customers."
As of the end of 2011, Norcross said that about 3,000 businesses had filed paperwork for licensing. Some have already been approved; others will take a few more months to process. The application cost per location is $800, and regulators conduct background checks and require financial stability, including at least $25,000 in net assets.
A portion of the fees paid to the state is expected to fund a financial literacy fund for adults.
Consumer and faith-based groups say payday lenders have run amok with their promises of providing desperate Texans with quick money. (They started the website Texas Faith for Fair Lending to raise awareness about the problem.) In the midst of the regulation debate in the Texas Legislature, Bishop Joe Vasquez of the Catholic Diocese of Austin testified that nearly 20 percent of the people the diocese was assisting had reported using payday and auto title loans — and that debt was the reason they sought help from the church.
“If payday lenders were not making money from these families to line their own pockets, perhaps these families would not need the charitable and public assistance they receive,” Vasquez said in the February 2011 hearing. “They are generally embarrassed to admit they sought a loan without understanding the fees involved. We are concerned that our charitable dollars are in fact funding the profits of payday lenders rather than helping the poor achieve self sufficiency.”
Considering the current economy and the high number of impoverished residents in Texas, the market for short-term, high-interest loans is unlikely to drop. Craig Smith, the director of government affairs for Austin-based lender EZCORP, said his company's branches statewide plan to get licensed and are in the process of complying with the new disclosure requirements. This includes investing in more training for employees.
He knows the industry is frowned upon for practices many perceive as being predatory, but he says it all boils down to access to credit — and that many Texans from all walks of life find themselves struggling at some point to pay the bills.
“We provide loans to people with riskier credit, and there’s a cost to do that,” he said. “We believe the state did a good job in balancing the financial impact of these new regulations with the needs of the consumer so that the consumer has proper protection and oversight."
This could be just the beginning of regulations for the payday and auto title loan industry in Texas. Bee Moorhead, the executive director of Texas Impact, a faith-based group focused on social justice issues, said lawmakers failed to pass a third bill last session that would have prevented payday lenders from charging exorbitant interest rates, sometimes up to 500 percent.
“If they were planning to make a predatory loan to a person before, they can still do it — but they’ll be more in the spotlight when they do it,” she said.
Moorhead said the key now is implementing another part of the licensing law that requires businesses to submit data to the state that will track their services.
“At the end of the biennium, we should end up with a better idea of who is borrowing this money and under what circumstances — and what happens when they do — to decide if more needs to be done,” Moorhead said.