Austin American-Statesman editorial: Texas needs tougher payday lending laws

Two years ago, state lawmakers passed a couple of timid rules regulating businesses that make short-term, high-interest loans. Going where the Legislature failed to go, Austin, San Antonio, Dallas and El Paso since have passed rules more tightly restricting so-called payday lenders whose fees and charges have earned them a predatory reputation.

Payday lenders want the Legislature to pass additional regulations during the current session because, they say, they need the consistency that comes with statewide rules. And, they argue, cities don’t have the legal right to regulate their fees and charges.

Some of the rules cities have passed are zoning rules that restrict where payday lenders can do business. Zoning regulations are a matter for local governments, not the Legislature. But, yes, when it comes to regulating terms offered by lenders, statewide rules would be better, and not just for the industry but for consumers throughout Texas.

So the Legislature should give payday lenders the statewide rules they say they want, but not as the industry would prefer — as weakened versions of the measures that have passed locally. The regulations passed by the Legislature in 2011 required payday lenders to register with the state and to post their fees and terms of service. They were a start but were insufficient.

Tougher restrictions failed in 2011. They should pass this session, starting with lawmakers closing the loophole in the state’s usury law that allows payday lenders to charge exorbitant fees and interest rates. Legislators also should limit the number of times a payday loan can be rolled forward to break the cycle of debt that traps too many borrowers.

Payday lenders loan small cash amounts, often less than $1,000, that typically must be paid back in two weeks. A fee is charged on the loan, and if it can’t be paid back on time, lenders extend the loan, adding another fee when they do so. Fees on payday loans equate to usurious annual interest rates of several hundred percent, and a loan of a few hundred dollars can turn quickly into a debt two or three times the amount of the original loan.

Auto-title loan companies operate similarly to payday lenders. Borrowers put up their car title as collateral for a cash loan and either pay off the loan with fees and interest in a short period of time or roll the balance into a new loan with new fees. Again, loan charges amount to usurious annual interest rates.

The Austin City Council, following examples set in other Texas cities, passed an ordinance in August 2011 that requires payday lenders to register with the city, caps cash advances and restricts the number of times a borrower can refinance a loan. Last year, the council used the city’s zoning authority to limit where lenders can operate.

The payday lending industry counters criticism leveled against it by saying it fills a need among consumers — who are often low-income and minority — who need quick cash but might not qualify for traditional loans from banks or credit unions. The industry says the vast majority of borrowers repay their loans on time.

To try to protect themselves from state regulations, payday lending companies have contributed heavily to lawmakers. A 2011 report by Texans for Public Justice, a legislative watchdog group, found that payday and auto-title lenders had donated $1.4 million to state lawmakers in the 2010 election cycle and had spent up to $8.4 million on lobby contracts between January 2009 and March 2011.

In an editorial published as the Legislature’s first state payday regulations took effect, we wrote, “The modest reforms that survived the 2011 session despite the sums of money spent in opposition should be considered a warning shot.” It seemed more regulations were a matter of time. The time has come. This session should finally see the passage of rigorous payday rules.

This editorial was published in the Thursday edition of the Austin American-Statesman.

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