Owner's Box

Chapter 12: Just Say No vs Yes We Can!

In America today, the real test of leadership is whether things get done. When people measure public servants, the basic question is the one that Ronald Reagan posed when running against Jimmy Carter—“whether tomorrow will be better than today”.

So let’s take a look at predatory lending. In Texas, interest rates on pay day loans are now 1100% per annum. Moreover, Rick Perry has appointed William J. White, senior executive handling ‘governmental affairs’ for one of America’s biggest payday lenders to head the Texas Finance Commission, the very agency created to regulate usury.

What do other leaders do in other states and cities to fight outrageous practices by predatory lenders today?

Yesterday, the Arkansas Attorney General, Dustin McDaniel, sued an online predatory lender that provides quick loans with a minimum interest rate of 364 percent. Back in April 2008, he had asked payday lenders throughout the state to shut down immediately or face the likelihood of lawsuits from his office. The Attorney General based his decisions on two recent Supreme Court opinions that make it clear that the high interest rates charged by payday lenders violate the state constitution and the Arkansas Deceptive Trade Practice Act.

At the height of payday lending there were about 275 lenders throughout Arkansas. The last brick-and-mortar payday lending chain in Arkansas closed all its stores on July 31 of last year. McDaniel is now going after online sites.

In Texas, payday lenders charge Texas borrowers up to 1100 percent APR on short-term loans that they claim help cash-strapped Texans make it to payday, yet trap borrowers in a cycle of debt. While Texas law technically prevents payday lending, Republicans in the Texas Legislature have maintained a loophole for predatory lenders that allows them to operate outside the law.

In July 2005, Texas-based payday lenders regrouped as businesses operating under Texas’ Credit Service Organization Act. As a Credit Service Organization (CSO), a payday lending company dodges both federal guidelines restricting payday loans and the interest rate limits established by the Texas Finance Commission (TFC). Two months later, I wrote a letter to our Attorney General, Greg Abbott, stating that it was that this business model is merely a tactic for evading state laws and regulations. Under state law, CSOs are not licensed by the state regulator, the Office of the Consumer Credit Commissioner, and their fees are completely unregulated. In essence, by organizing under the CSO business model, pay day lenders are exempting themselves from state and federal consumer protection measures.

Section 342.008 of the Texas Finance Code states:

A person who is a party to a deferred presentment transaction may not evade the application of this subtitle or a rule adopted under this subchapter by use of any device, subterfuge, or pretense. Characterization of a required fee as a purchase of a good or service in connection with a deferred presentment transaction is a device, subterfuge, or pretense for the purposes of this section. As the State’s leading enforcement agency, I wrote that it was imperative that his office investigate this business model and take necessary enforcement actions against businesses purposefully and illegally skirting Texas laws.

Certainly reorganizing a business model under a lenient statute while still conducting business as usual constitutes subterfuge and pretense. Our office asked him to please work with the Office of Consumer Credit Commissioner to ferret out illegal payday lending practices and take appropriate enforcement actions.

Today, while the number of states that have banned payday lending continues to grow, in Texas the industry is flourishing. Payday lending is big business in Texas. Each year, payday loans cost Texas families nearly double what the state sets aside for financial aide so that our kids can attend college. A recent study calculated the financial impact of predatory lending on Austin, Dallas, El Paso, Houston, Fort Worth, and San Antonio. In these cities alone, unregulated payday lenders lent $1.14 billion in 2006. To obtain these cash advances, working Texans paid at least $400 million in interest and fees, not to mention bank overdraft fees and credit costs ensuing from often brutal collection practices. Texas-based lenders now charge among the highest interest rates in the nation, with up to 1,150 percent APR routinely charged on payday loans.

It should come as no surprise, then, that from 2000-06, predatory lenders spent more than $700,000 in political contributions to Texas politicians, including top contributions to Rick Perry, David Dewhurst and Greg Abbott.

Back when McDaniel started combating predatory lenders in Arkansas, our office wrote another letter to Greg Abbott, describing what other states were doing in combating predatory lenders. In Florida for example, I mentioned that some payday lenders were using the CSO model to evade that state’s usury laws. In a case brought by the Florida Office of Financial Regulation, an Administrative Law Judge ruled that EZPawn Florida Inc., a unit of EZCorp Inc., had violated state usury laws capping interest at 18 percent. Operating under the CSO model, EZPawn charged 18% on each loan, and collected a further fee of $15 or $30 for every $100 lent, in other words a cost requirement for the loan. In that case, the Judge recommended that the regulator issue a cease-and-desist order against the company.

In California, we continued, regulators were investigating lending by CSO’s and the National Consumer Law Center in Massachusetts had written about these type of lenders, calling them a “scheme” through which the “payday storefront operating in conjunction with a background lender can charge in total more than what the state payday loan laws… or state usury laws would permit.” We asked Abbott to please provide me with any plans in his agency to crack down on predatory lenders. In addition, I asked him to please provide our office with a written summary of every case or action brought by his agency. We never heard back.

Contrast the absolute lack of any meaningful action by Perry, Dewhurst and Abbott, with Mayor Newsome’s initiative in California. In December 2009, Newsome started ‘Payday Plus SF’ to put the unbanked into checking accounts and limit interest on short term loans to 18% APR.

‘Payday Plus SF’ is the latest in a series of successful financial empowerment and financial literacy programs spearheaded by San Francisco Treasurer José Cisneros and Mayor Newsome. This program was launched at 13 San Francisco credit union locations and has helped more than 45,000 unbanked San Franciscans into checking accounts. Currently, 99% of payday loan borrowers are unable to pay off their loan within a two-week term. The typical California payday borrower will take out 10 loans in a year before they are finally able to repay the original loan. ‘Payday Plus SF’ shows what can happen when responsible elected leaders, neighborhoods and the financial community come together to help low-income families in dire, but temporary, financial straits. More and more Texans need to ask the basic Ronald Reagan question—“will tomorrow be better than today”. Leadership means solving the challenges ahead, not passing them on to the next generation. Just saying no to any meaningful action to stop predatory lending will not fly.

More and more states and now cities are stepping into help real people with real credit crises in a time of real peril.

And more and more ‘yes we can’ is what people want to hear.