Senator Eliot Shapleigh - El Paso, Texas

Can you imagine the Texas legislature actually voting to authorize interest rates on loans of more that 700 percent? If some of the state’s most powerful lobbyists get their way, that’s exactly what’s going to happen.

Texas has always protected desperate people from greedy lenders – since the founding of the Republic. Famously writing GTT (Gone To Texas) on their doors, many early settlers struggling with debt moved to Texas where they were promised a chance to escape lenders and rehabilitate. When Texas joined the Union, the Texas Constitution included a principled stand against usury with specific restrictions against high interest rates.

More than a century and a half later, the Texas Legislature is considering a measure to eviscerate this fundamental consumer protection by expressly authorizing a new generation of loan sharks – the payday loan industry.

Payday lenders prey on working consumers who live paycheck to paycheck, particularly immigrants and members of the military, offering loans up to $1000 against a future payroll or government benefits check. Typically, the consumer writes a check for $230 to borrow $200 for two weeks (usually their next payday). The actual cost of that loan for two weeks is $30, or an annual percentage rate (APR) of 390%.

Some payday loans can end up costing consumers more than 700 percent. For comparison, some of the higher APRs on credit cards are less than 24%.

Consumers desperate enough to visit a payday lender often find there’s not enough money on payday to cover the loan and all the fees, and still make rent or put food on the table. No problem, the payday lender is happy to "roll it over," for a new fee, leaving the borrower owing most or all of the $230 at the end of the next transaction. That brings the total finance charges for a $200 one-month loan to $60. That’s exactly what payday lenders bank on. This is a one-time transaction for very few people – in states where this stuff is legal borrowers typically make 10 -12 such transactions.

Unlike many states, payday loans are regulated in Texas under industry-friendly rules adopted by the Texas Finance Commission in 2000. Lenders can loan up to $500 and hold borrower's personal checks to make sure the loans are repaid or refinanced. Lenders can currently charge a $10 per loan fee plus 48% annual interest for payday loans. For some loans, these terms can result in interest rates as high as 309%.

However, most payday lenders aren’t satisfied with those generous terms, so they exploit a loophole that allows them to partner with out-of-state banks that allow them to charge as much as they want.

Fortunately, federal banking regulators have started to crack down on payday lending. Most federal regulators no longer permit the banks to "rent their charters" for payday lending. Only the Federal Deposit Insurance Corporation (FDIC) has permitted state banks to engage in payday lending. Now that arrangement is under threat, due to new limits recently announced by the agency, and the payday lenders are pulling out all the stops to legalize a practice in Texas before their federal loophole closes.

Payday lenders are now working overtime to pass HB 846 by Representative Dan Flynn (R-Van), a law which would codify business as usual. The industry claims the bill will allow the state to regulate them. But Texans should wonder what benefit they get from payday lenders being "regulated" in Texas if they will be able to legally charge 700 percent interest rates. Under the proposed law, if a lender charges you a usurious 700 percent interest rate, too bad, it’s legal! Did a lender make you pay $400 in interest for a $200 loan? Sorry, that’s legal too!

This is bad enough in any case, but it’s particularly objectionable when so many of the victims of predatory lenders are soldiers, sailors, airmen and marines who have been laying their lives on the lines to protect the rest of the country. Won’t Texas now stand up to protect them?

Proponents of payday lending say that the practice offers cash strapped consumers help in emergency situations. But they ignore the fact that far too many people get trapped into a revolving cycle of loan after loan – payday loans almost always create more financial trouble for consumers than they solve. Other options exist, such as cash advances on credit cards, small loans from a credit union, even paying bills late or paying one-time bounced check fees are cheaper.

If the Legislature adopts HB 846 and gives payday lenders what they want, history will be turned on its head, and it’ll be the payday lenders in other states who’ll be putting "Gone To Texas" signs on their doors —and far too many Texas families facing financial catastrophe will be wondering what the Texas Legislature was thinking.

Colonel Steve Strobridge, U.S. Air Force (Ret.), is the Director of Government Relations for the Military Officers Association of America. Luke Metzger is an Advocate with the Texas Public Interest Research Group (TexPIRG).