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Outlook Uncertain for Payday Loan Regulation

Consumer advocates and payday lending industry representatives thought 2013 would be the year for a politically viable solution to regulating short-term-lending institutions. The hoped-for solution, though, seems to be in legislative trouble.

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Consumer advocates hoped that 2013 would be the year for a serious effort to rein in the most egregious practices in the payday and auto-title lending industry — financial institutions that offer short-term loans to low-income borrowers at high interest rates. But now, the leading vehicle for regulatory reform, Senate Bill 1247, by state Sen. John Carona, R-Dallas, threatens to stall in a House committee, and the bill’s advocates say they are facing their worst-case scenario.

If Carona’s bill fails, reform advocates worry the Legislature could pass one of several other measures that would exempt payday lenders from municipal protections adopted in several Texas cities, including San Antonio, Dallas, Austin and El Paso.

SB 1247 would also pre-empt local regulation, but it would do so while establishing a statewide regulatory framework and imposing certain restrictions on lenders. Those include pegging the maximum permissible loan a lender can offer to a borrower’s monthly income, limiting the number of financial products lenders could offer, and capping the number of times an indebted borrower could refinance a loan.

The bill’s approach, establishing limitations on lenders while eliminating a patchwork of local municipal ordinances that are currently the subject of court battles, had led many of those involved in negotiations to conclude that the measure was the only politically viable vehicle for regulation this session.

But having passed the Senate, the bill now appears stuck in the House Committee on Investments and Financial Services. A failure to pass it out by May 18, the last day for Senate bills to advance out of House committees, could doom the regulatory effort and make way for a pre-emption-only bill to gain momentum, which is what reform advocates fear.

If Monday’s House committee hearing on the bill is any indication, SB 1247 might have to be altered substantially just to make it to the House floor.

The bill is sponsored in the House by the committee’s chairman, state Rep. Mike Villarreal, D-San Antonio. His version of the bill straddles the gap between Carona’s original Senate committee substitute, which had weaker consumer protection provisions, and the bill that ultimately passed the Senate, which had stronger ones. But several of the House committee members were openly contemptuous of the effort to regulate payday and auto-title lenders.

The committee’s vice chairman, state Rep. Dan Flynn, R-Canton, said on Monday that the bill would “restrict the ability of someone to get credit,” a violation of a consumers' rights. And he objected to negative characterizations of payday lenders.

“I get offended when you try to assign morality to a business practice,” Flynn said.

According to the left-leaning Texans for Public Justice, Flynn has received more than $50,000 in campaign contributions from payday and auto-title lenders, the third most of any representative.

State Rep. Larry Phillips, R-Sherman, called payday lending a non-issue, and he said consumer groups were helping to exaggerate the level of public outrage.

Phillips also announced his intention to offer amendments that would dramatically increase the range of options available to short-term lenders — including one that would increase the time limit for a multiple-installment loan to two years, four times the current limit.

Other members who indicated they would be unlikely to support the bill as Villarreal introduced it include state Reps. Charles "Doc" Anderson, R-Waco, and Jodie Laubenberg, R-Parker, whose proposed constitutional amendment, HJR 112, would prevent state agencies from collecting consumer financial information. Laubenberg's proposal could make it more difficult for the state to enforce provisions of SB 1247.

The committee’s other Democrat, state Rep. Oscar Longoria, D-Mission, also expressed unease about parts of the bill, namely a provision that would limit borrowers to one auto-title loan at a time. If a borrower has two cars, Longoria said, he or she should be allowed to take out loans on both.

Consumer advocates said they hoped that some form of the bill would emerge before May 18, though they expect the bill will be greatly weakened.

"I remain optimistic. I think there’s a common ground that we can find which preserves both meaningful protections and access to credit," said Ann Baddour, a senior policy analyst with Texas Appleseed, a public-interest law center. "I think there’s still a willingness to see something happen."

A weakened bill could pose yet another problem, though. When the bill passed the Senate, Carona promised that six amendments strengthening consumer protections would be in the final version. Two of those six provisions have already vanished from Villarreal's proposal that the House committee considered Monday.

They include a requirement that lenders accept partial payment on the principal of outstanding loans and a measure that would impose penalties and allow lawsuits from borrowers, if lenders attempt to introduce new financial products outside of the four explicitly allowed by law.

If Carona holds to the promises he made on the Senate floor, those provisions would have to be added back before the Senate votes on a final version. 

In an email, Carona said he would not "back away from those commitments made to my Senate colleagues, without their explicit authorization to do so."

State Sen. Kirk Watson, D-Austin, was one of several senators who indicated during debate on the bill April 18 that he wouldn't vote for it without the six promised provisions.

"I think that there will be an effort," Watson said, "to stop 16 people from voting for any conference committee report that strips those out."

But the Senate's treatment of SB 1247 has spooked some on the industry side. Lenders who had accepted Carona's original committee substitute now argue in favor of killing the bill, saying that the Senate's unpredictable behavior has eliminated an incentive to compromise.

"Even if you are able to craft a responsible bill, I fear what will happen when it gets back to the Senate," Cheney Pruett, a lender from Texarkana, said at the House committee hearing. "They will not be happy until this business ceases to exist."

If SB 1247 fails to regain momentum, consumer advocates fear the industry’s attention could shift to proposals that would relieve payday and auto-title lenders from local regulations. Those include House Bill 2609 by state Rep. Jim Pitts, R-Waxahachie; Senate Bill 1466 by state Sen. Craig Estes, R-Wichita Falls; House Bill 2908 by state Rep. Harold Dutton, Jr., D-Houston; and House Bill 2953 by state Rep. Ryan Guillen, D-Rio Grande City. Two of those measures have passed out of House committees and are awaiting a vote on the House floor.

Payday and auto-title lenders have repeatedly sued municipalities over the issue of local regulation. Many Texas cities have passed ordinances that restrict payday lending, which are widely viewed as ploy to pressure lawmakers into passing statewide regulations.

The Consumer Service Alliance of Texas, which represents payday and auto-title lenders and is a plaintiff in several of the municipal lawsuits, declined to comment for this story.

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