Senator Eliot Shapleigh - El Paso, Texas

State Senator Eliot Shapleigh showed this photograph from El Paso of an employee of a payday lender at a news conference at the state Capitol on Monday.

AUSTIN, March 23 – Lawmakers on Monday said a stop has to be put to subprime, payday and refund-anticipation lenders that prey on minorities and helped contribute to the unsavory economic times Texas is now mired in.

Sens. Eliot Shapleigh, D-El Paso, Wendy Davis, D-Forth Worth and Rodney Ellis, D-Houston, said critical oversight is lacking over lending agencies who can legally charge triple-digit interest rates on emergency, car-title and paycheck-advance loans where the end result is usually an unbroken cycle of continuous debt.

“Toxic assets are being created in Texas everyday, in subprime loans, in payday loans (and) in refund anticipation loans,” said Shapleigh, borrowing the “toxic” catch phrase currently associated with the federal bailout of the lending industry. “We here in Texas need to take those toxic assets off the streets and that starts with regulating them on an ordinary market where we can bring transparency.”

Following the Federal Deposit Insurance Commission’s (FDIC) decision to disallow payday and other “emergency” lenders to act as brokers for out-of-state banks, nearly all payday lenders in the state began registering as credit service organizations (CSOs), according to Shapleigh’s office. The move allows CSO’s to be free from the laws that currently govern small loans and from regulation from the Office of Consumer Credit Commissioner.

“Operating through a loophole designed to avoid the ten-percent constitutional cap on interest rates, payday loans operate as predatory agents for credit service organizations disguising their usurious interest rates as service fees,” explained Davis.

In response, Davis and Shapleigh have co-authored a series of bills they said would hold what some could call legal loan sharks more accountable.

SB 244 would make CSOs subject to interest rates set by the Office of the Consumer Credit Commissioner and SB 242 would require payday lenders to establish a weekly database where they must report the amount of cash advanced under each transaction made, the amount of outstanding transactions as of the last day of the preceding week, the number of transactions renewed during the week and the amount of fees, charges and interest collected during the preceding week, among other things.

“Currently credit service organizations operate with extremely little oversight (and) it’s been very difficult to gather data in our state with regard to the prevalence and the depth of the predatory practice,” Davis explained.

Because of the lack of oversight, a $300 payday loan could yield an overall annual percentage rate of 1153 percent, Shapleigh advised.

Shapleigh likened the payday agencies to those who blindly led borrowers to apply for subprime mortgage loans and said that lawmakers’ efforts to draw attention to the problem years ago went unnoticed. As proof Shapleigh provided to the media a copy of a letter written in 2007 to Gov. Rick Perry, where he recommended a special session in 2008 to address the matter. The governor’s office, Shapleigh said, did not respond.

In response to the current crisis, Shapleigh has introduced SB 1284, an omnibus mortgage reform bill that will prohibit pre-payment penalties for subprime loans, loan flipping by a lender, and lender financing of credit insurance. The bill would also require lenders to mail homeowners a bill of rights and that a notice of default be sent to a housing counseling agency designated by the borrower. The bill would also increase the surety bond of finance lenders or brokers of residential mortgage loans to $100,000 and would require lenders to schedule a face-to-face or telephone meeting with a borrower before a notice of default is sent.

Ellis on Monday spoke in favor of the Shapleigh-Davis bills and said that refund anticipation loans, or RALs, need to be monitored and the rules governing them modified.

“The annual percentage rates of RALs range from 70 to 700 percent after fees,” he said. “Tax preparers and RAL lenders rarely report the true rate to consumers but rather only report a much lower rate that excludes the fees. Tax preparers who offer RALS engage in aggressive and often misleading advertising campaigns during the tax season …. In truth consumers can choose the IRS refund in as little as ten days without utilizing these high-cost, high-risk loans.”

Ellis added that in many cases consumers are not even aware that they’ve even taken out the loan and added that RALS erode the benefit of the Earned Income Tax Credit (EITC) for working Texans.

Minorities must also be more watchful and educated of predatory lenders, as Shapleigh explained that Hispanics specifically are targeted more than other ethnic groups.

“Clearly minorities are hit harder by payday loans and subprime loans,” he said. “If we gave you the map of the top 25 MSAs in the country where you have subprime lending penetration, seven of the top ten are in Texas.”

Of those top seven, the border cities of El Paso and Laredo rank first and third, respectively.

“Why? Because Hispanic families are often unaware of the underlying transactions, don’t know what an ARM (adjustable rate mortgage) is, do not have a clear disclosure on prepayment penalties, and on the other side there are three or four paychecks from that family that are paying the mortgage,” said Shapleigh. “Predatory lenders and subprime lenders have found that out and, frankly, targeted Hispanic communities for high-interest loans.”

Shapleigh showed a photograph of an employee from a payday lender wearing a sign advertising a payday loan at a ten percent interest rate. The employee was standing near an entrance ramp to I-10 in El Paso while another employee wearing a similar sign stood across the street catching motorists headed the other way.

“This is an illegal act, doing this without the appropriate disclosures,” Shapleigh said of the advertising. He added that payday lending is directly tied to lobbyists and the influence they have over lawmakers.

“I wrote the Attorney General and asked ‘What are you going to do about this in Texas? What are you going to do about this in El Paso?’ No response. The point is the same guys that are funding these campaigns are the ones behind these practices.”