Texas has laws prohibiting payday lenders from charging high interest rates. It just doesn't look that way.

Companies that provide short-term loans at high interest rates use out-of-state lending partners to get around Texas' usury laws.

Now, some state legislators are gearing up to close those loopholes and strengthen regulation of the payday loan industry, even as the industry launches a major public relations campaign aimed at polishing its image.

The payday lending industry says it provides an important service to consumers who need occasional help paying their bills – potentially avoiding more costly late fees or reconnection charges on their utilities.

Critics say the practice amounts to predatory lending, with service fees and shockingly high annual percentage rates that keep the working poor trapped in debt.

"Predatory lending is a plague," says Sen. Eliot Shapleigh, D-El Paso, who's written bills for the current legislative session that would put payday lenders under tighter oversight. "In America today, in the top 10 cities where predatory lending is worst, seven of them are Texas cities. All are minority communities, where predators have closed the door to mainstream banking and prey on soldiers, young women and struggling families."

Payday lenders in Texas used to partner with banks based in states without usury laws, and those banks would actually provide the payday loans. In 2005, federal banking regulators discouraged banks from providing such loans.

"We're not dealing so much with banks anymore," says Leslie Pettijohn, Texas consumer credit commissioner. "The federal regulators have changed their criteria and have instituted guidelines."

Instead, payday lenders are using anonymous third-party lenders under state laws regarding credit services organizations, or CSOs, the companies that offer to help repair your credit.

"The CSO model has been their attempt to escape regulation of any kind. It's really, really unregulated at this point," says Don Baylor, senior policy analyst at the Center for Public Policy Priorities in Austin. "High-cost payday loans are considered among the most destructive financial products in the marketplace."

A bill written by Mr. Shapleigh would close the CSO loophole by limiting CSO associations with lenders "to evade our state usury laws."

"Since July 2005, payday lenders have exploited this loophole to deregulate their industry and charge unlimited rates for payday loans," Mr. Shapleigh's office says. "Since the switch to the CSO model, prevailing interest rates have increased by 25 to 40 percent."

In the current environment, Texas regulators' hands are tied.

"We're at an odd situation here in Texas in the current market," Ms. Pettijohn says. "The vast majority of payday loans are not regulated in Texas."

Even amid the criticism, payday lending is growing in America's debt-obsessed society, with companies opening shiny new stores in middle-class and even upper-class neighborhoods.

The Community Financial Services Association of America, which represents the industry, is running print and television ads in Texas as part of a $10 million public relations and consumer education campaign.

"It's just part of a larger national educational effort that says, 'This product is appropriate for responsible use,' " says Jabo Covert, Texas spokesman for the association. "It's appropriate if you use it for the right reasons and for the right times."

One of the print ads – titled "A Customer Pledge From the Payday Advance Industry" – lists a series of changes that the industry is undertaking, including:

• Offering extended repayment plans, which give consumers having trouble repaying a payday loan more time to repay, with no new fee or "accrued interest of any kind."

• Refraining from advertising payday loans for "frivolous uses."

"We have always stressed that cash advances are not long-term financial solutions," the ad says. "They are one way to deal with unplanned, short-term expenses."

Texas is a key market for the industry.

"We run those ads in Texas because we want to show what kind of industry we are," Mr. Covert says. "This group is going to be responsible, and we want to get rid of those companies that are not responsible."

Ironically, the industry wants regulation in Texas.

"We won't do business in Texas until they pass a state regulatory law that regulates the product," says Mr. Covert, vice president of Check Into Cash Inc., a payday lender based in Cleveland, Tenn. "Clearly in the past, there have been bad actors across the industry that have given the product a bad name. The only way to get a handle on this is to ensure that strict laws be passed and that those laws be strictly enforced. It creates a much more stable marketplace, not only for lawmakers and regulators, but the general public."

But Mr. Shapleigh says the industry's real motive is to head off federal regulation.

"Predators want to pass bills in Texas so they can make the case in Washington, 'Don't regulate us there. We are regulated in Texas,' " he says. "All these regulations do is put the power of law behind outrageous rates of interest – up to 800 percent per annum."

Congress passed a law last year that bars financial service providers from selling certain products on federal military installations without first providing several key financial disclosures.

In Texas, Mr. Shapleigh previously authored a law that prohibits lenders from taking certain actions against military personnel, including instituting debt collection proceedings during a deployment.

"Military personnel are paid regularly, never get laid off, and face penalties for failing to repay debts, making them a wise investment for payday lenders because the chances of default are very slim," he says. "The relative youth of military personnel, and a lack of sophistication in financial matters, make them ill-equipped to deal with the financial burden produced by payday loans."

In the current legislative session, Mr. Shapleigh has filed a bill that would cap interest rates at 36 percent for military borrowers and dependents, and another bill to establish a database to collect information on payday loans through a third-party vendor system.

This system would collect data on the volume and total dollar amount of payday loans, the average loan amount, the average loan term, and the socioeconomic characteristics and behavior of borrowers.