Senator Eliot Shapleigh - El Paso, Texas

Members of the military and their families are prime targets for payday lenders. Military personnel are paid regularly, never get laid off, and face penalties for failing to repay debts.

Payday lenders prey on working people who live paycheck to paycheck, offering loans as much as $1,000 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 percent. Some payday loans can end up costing consumers more than 900 percent!

During the 79th Legislature, Senator Shapleigh passed S.B. 1479, the Texas Soldiers' Payday Protection Act, to protect military members and their families from these payday-lender practices. For example, S.B. 1479 prohibits lenders from conducting collection activities during deployment and requires lenders to make disclosures to military costumers regarding these restrictions.

Proponents of payday lending say the practice offers cash-strapped consumers help in emergency situations. But they ignore the fact that far too many people, many of them military personnel, get trapped into a revolving cycle of loan after loan. Payday loans almost always create more financial trouble for consumers than they solve.

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 onetime transaction for very few people; in states where this stuff is legal, borrowers typically make 10 to 12 such transactions.

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

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.

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 has permitted state banks to engage in payday lending. Now that arrangement is under threat, because of 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.

Thanks to a procedural maneuver by Rep. Trey Martinez-Fischer (D-San Antonio), backed by a coalition of consumer, religious, military and civil rights groups, the payday lenders failed to pass H.B. 846 by Rep. Dan Flynn (R-Van Zandt). The bill would have codified business as usual and allowed the lenders to evade new federal standards.

Instead of complying with the Texas small loan law or the payday loan regulations set by the Texas Finance Commission [Texas profile], and having failed to win authorizing legislation at this year’s Texas legislature, the big payday lenders in Texas have found ways to continue making loans that exceed state law rate caps.

The firms plan to use unregulated Credit Service Organization [CSO] status in Texas as a way to evade new federal guidelines. The Texas Credit Services Organization (CSO) Act permits companies to act as loan brokers. These CSOs are not licensed by the Texas Office of Consumer Credit Commissioner and their fees are completely unregulated.

There is more work to be done to stop predatory lending in Texas. Senator Shapleigh is at the forefront of this effort because he believes in investing in the American Dream.