Senator Eliot Shapleigh - El Paso, Texas

In 2006, payday loans cost low- and moderate-income Texans $259 million. (photo courtesy www.consumercal.org)

The Center for Responsible Lending, a leading consumer advocacy, research and policy organization, states that, according to their research, payday borrowers across the nation are paying interest at annual rates of 400 percent.

One of the CRL’s research projects, “Financial Quicksand: Payday Lending Sinks Borrowers in Debt,” clearly reveals that the payday lending business model is designed to keep borrowers in debt, not to provide one-time assistance during a time of financial need, and further declares that borrowers who receive five or more loans a year account for 90 percent of the lenders’ business.

The report finds:

- Ninety percent of payday lending revenues are based on fees stripped from trapped borrowers, virtually unchanged from previous 2003 findings. The typical payday borrower pays back $793 for a $325 loan.

- Predatory payday lending now costs American families $4.2 billion per year in excessive fees.

- States that ban payday lending save their citizens an estimated $1.4 billion in predatory payday lending fees every year.

- In 2006, payday loans cost low- and moderate-income Texans $259 million.

In defining predatory payday lending, the CRL considered borrowers who have had five loans per year or more to be caught in a cycle of debt. A borrower facing this type of financial trouble is rarely able to resolve their problem within two weeks and pay off their loan in full. Most borrowers require several months, perhaps a year, to make up a serious financial shortfall.

Is it OK for the state to sanction the making of these loans to the most vulnerable, unsophisticated consumers, who are most likely to have the least disposable income? Should we be allowing these practices in our state?

By obscuring the long-term nature of their loans, payday lenders and their well-financed lobbyists were initially successful in convincing the majority of state legislators to exempt their product from existing small-loan laws. While many states have annual interest rate caps of 36 percent or less for small loans through conventional means, these so-called exempt rates can be 10 times higher for payday loans on the grounds that these are emergency two-week loans, not long-term obligations.

Some states recognized the defective nature of the payday loan product and refused to grant payday lenders exemptions from small-loan laws, prompting some payday lenders to disguise their loans as other products in order to continue illegal lending practices. As some states have taken a pro-active approach and passed anti-predatory lending laws, Texas’ legislators have turned a blind eye that has allowed questionable lending practices here to continue virtually unchecked.

Unfortunately, there is little recourse for those individuals in Texas who have been caught up in the payday loan whirlwind. A consumer wishing to complain about high credit card fees would file their complaint with the Federal Trade Commission. However, a person wishing to complain about a 400 percent payday loan and payday lender debt collection tactics would be directed to a state regulator, usually the state attorney general, as the FTC has no standing in this area.

Since the state of Texas is not, as a rule, inclined to favor the consumer over an industry that has developed a strong lobby in Austin, you can bet most consumer complaints are likely to be handled on a case-by-case basis, with every little attention paid to consumer protection as a mandate.

In 2004, a strong anti-payday lending law was passed in Georgia and upheld in federal court in 2006. In North Carolina, the state legislature let the payday authorization law sunset in 2001, while the commissioner of banks ordered Advance America to stop its payday lending in the state. Since that time, all the other major payday chains have agreed to leave North Carolina as well, under consent agreements with the state attorney general.

Isn’t it about time for our state legislators and the Texas attorney general to take consumer protection seriously and reform the existing laws on short-term lending? Isn’t it time to say no to the industry lobbyists and predatory lending in Texas and say yes to protecting those consumers who are the most vulnerable to these practices? Should we, as a state, continue supporting a business model that keeps low- and moderate-income families in a cycle of debt, all in the name of commerce?

There is certainly enough well-documented research and data available to make intelligent changes in Texas law that would keep our most vulnerable families from the negative effects of payday lenders and the unscrupulous tactics that many employ.

If our legislators and policymakers continue to allow these types of predatory practices, we should not be surprised or wonder why poverty rates in Texas continue to grow. When will our lawmakers do the right thing?

Rogers is president and CEO of the South Texas Adult Resource and Training Center of San Benito.