Senator Eliot Shapleigh - El Paso, Texas

Running short on cash?  Austin is full of "payday lenders" that will give you a quick loan -- for a high price.  A 7 On Your Side investigation discovered, payday lenders are using a loophole in the law to avoid state regulation -- regulation designed to protect you.

Drive through Austin's lower income neighborhoods and you'll see dozens of them -- payday lenders.

"In Texas anyway, there are more payday lending outfits than there are McDonald's and Whataburgers combined," said Don Baylor with the Center for Public Policy Priorities, a state government watchdog gorup.

They offer quick cash when you're in a bind, but how much are you really paying for that loan?

"The interest rates today on a payday loan are 11 hundred percent," said State Sen. Elliot Shapleigh (D-El Paso).

Texas has a limit on interest rates.  In most cases, it's 10 percent.  But when 7 On Your Side visited several payday lenders, we discovered much higher fees.

On hidden camera, one employee told us:  "You can walk out of here in less than 15 minutes with 15 -- up to 15 hundred dollars."

The pitch sounds good, but wait till you hear how much a 300 dollar loan will cost you.  Sixty-two dollars in fees and interest, and if you don't pay it back -- in full -- on time?  Up to another 62 dollars -- each month-- until you pay it off.

On hidden camera, another payday employee confirmed the charges.

Fox 7:  "So you have to pay the finance charge every time, if you don't pay the loan off?"
Worker:  "Correct."

But doesn't Texas have a limit on fees and interest?  Yes, but payday lenders use a loophole in state law to get around it.  Instead of calling themselves "lenders," they call themselves "credit service organizations," or CSOs.

CSOs don't lend you the money directly.  Instead, they act as a middleman, simply arranging a loan with an anonymous third-party.  Then, they charge you whatever fee they want to "arrange" the loan.

"They really thrive on what you'd call the 'economics of desperation,'" said Baylor.

CSOs were designed  to help consumers get their credit straight, but a 1997 law allows payday loan businesses to operate as CSOs with almost no oversight.

"They are required to register with the Secretary of State, but beyond that, there is no substantive regulation," said Leslie Pettijohn, head of the Texas Consumer Credit Commission.

Pettijohn's office receives complaints about payday lenders, but is powerless to take action.

"It is difficult to receive some complaints from consumers and not be able to handle the complaint in a mechanism, in a way, that we would normally be comfortable handling a complaint," she said.

"We gotta stop this," claimed State Sen. Shapleigh.

Shapleigh said he hears horror stories about customers trapped in a cycle of payday debt.  Shapleigh tried to close the so-called "CSO loophole" last year.  His bills would have banned CSOs from lending money, and given the Consumer Credit Commissioner regulatory authority over payday lenders.

"These aren't regulated.  They're not counted.  You can't get data on them," said Shapleigh.  "You don't know how many are being made.  And that's how the payday industry flourishes in Texas."

But Shapleigh's bills died in the House Financial Services Committee.  Since 2004, campaign finance reports show members of that committee have received more than 41 thousand dollars directly from the payday loan industry, and even more from industry lobbyists.

"A lack of political leadership really at the state level," said Baylor.  "They have really abdicated their responsibility."

Only one payday lender agreed to an interview for this story.  Advance America operates 13 locations in the Austin area, and 250 throughout the state.

"We don't trap any borrowers," insisted Advance America spokesman Jamie Fulmer.  "It's a very straight-forward, simple product that consumers use when they find themselves in a time of need, and consumers are overwhelmingly satisfied with this product."

Payday lenders argue that the state's 10 percent cap is too low, since short-term loans are so risky.  But Advance America also said, almost all their customers pay back their loans -- and most do it on-time.  Fulmer believes putting payday lenders out of business will only drive customers to more expensive options.

nothing to address the need for the product," he said. [sic].

Texas is the only state where payday lenders are unregulated.  Arkansas just passed a ban on them, and Oregon recently imposed a 36 percent interest cap.  Nationwide, there's already a 36 percent cap on loans to military members.

Shapleigh said he will try for regulation again in 2009, but he's not optimistic.

"I've tried to pass 25 bills in the past three sessions on payday lending, and they're over there with a slot of lobbyists -- there are 100 of them -- following me around to kill these bills," he said.

In the meantime, consumers who turn to a payday loan need to...

"Go into a transaction with their eyes open," said Pettijohn.

Because if something goes wrong, in Texas, there's no one to protect you.

If you have a bad experience with a pay-day loan business, you can file a complaint with the Secretary of State's office.  But again, there is little they can do.  You can also file a Better Business Bureau complaint, or sue in small claims court.