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Texas Week: Regulating Payday Loans | September 21, 2012

Watch September 21, 2012 | Regulating Payday Loans on PBS. See more from Texas Week.

San Antonio City Council has voted to regulate payday loans. City Councilman Diego Bernal points to a cycle of debt that people who use these services often fall into. He says the goal of the new city ordinance is not to eliminate the option but to protect those who take these loans from paying high interest rates he says are unconscionable.

[…]

Local action on payday lending – Off the Kuff

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Patricia Kilday Hart reports on a promising movement.

Where payday lending comes from

No one was particularly surprised a year ago when the Texas Legislature failed – once again – to pass meaningful regulation of the payday and auto title loan industries. After all, the folks who charge triple digit interest on loans to society’s most desperately poor had invested $3.9 million on a persuasive lobby team to protect business as usual. But the coalition of consumer advocates hoping to de-fang the loan sharks – which included a wide swath of Texas churches – didn’t sit around and sulk.

Instead, the Texas Fair Lending Alliance, teaming up with the interdenominational Texas Faith for Fair Lending, found a way around the Austin lobby juggernaut. Taking a cue from the political axiom that “all politics is local,” they made their case to city councils in Austin and Dallas, which recently passed ordinances protecting their residents from open-ended loans with escalating fees and interest. This week, a San Antonio City Council committee took up the issue. Could Houston be far behind?

Like San Antonio, Dallas and Austin, poor neighborhoods in Houston have little access to banking, leaving a vacuum that the payday lenders have exploited. And really, is there any other word that better describes this business than “exploit?” When debtors can’t pay off their entire loan, they must pay stiff “rollover” fees plus interest. Imagine a family making $200 payments every two weeks for four months – shelling out $1,800 – without making a dent in their principal loan of $700.

That family is not imaginary, but the reason one San Antonio pastor became politically active. As I wrote last year, the family sought financial assistance from the Rev. Chad R. Chaddick’s church. Chaddick came to realize that lots of families obtaining financial assistance from churches were simply handing the cash over to lenders, in many cases, to keep their cars from being repossessed. “Eye-opening,” was how the polite minister described the situation.

Here’s more information about that San Antonio ordinance, which was proposed by City Council member Diego Bernal:

The proposed ordinance would be stronger than a law passed by the Legislature in 2011. That law requires payday lenders to post a fee schedule and submit to state regulation.

Payday lending is banned in at least a dozen states, and others limit loan amounts. In Texas, there’s a cap of 10 percent on annual interest rates, but Bernal said companies have found a loophole by calling themselves “credit-repair agencies,” which aren’t subject to the same limit.

Bernal’s plan has several elements, including limiting payday loans to 20 percent of the borrower’s gross monthly income and limiting auto title loans to the lesser of 3 percent of the borrower’s gross annual income or 70 percent of the vehicle value. He also seeks to require that the loans be limited to no more than four installments or three rollovers or renewals and that the proceeds from each installment or renewal reduce the loan principal by 25 percent.

Now, payday lenders can continually collect interest and fees from customers who can’t pay down the principal.

“You can put yourself into debt in perpetuity,” Bernal said. “And this (proposal) limits that.”

Seems reasonable to me. By the way, here’s how you can tell that the state law that was passed last year – which was still better than nothing, though not nearly as good as it should have been – is going to be inadequate. According to this Express News editorial in favor of Bernal’s proposal, Rick Perry appointed William White, the former head of payday lending giant Cash America, to head the Texas Finance Commission, which is the agency responsible for regulating payday lenders. Remember how well it worked out when Perry appointed one of Bob Perry’s top executives to head the agency that would regulate home builders? It’s like that.

See here and here for more on Bernals’ proposed ordinance, and see the Observer for more on the Texas Fair Lending Alliance. The Alliance released a poll showing broad support for further regulations and limits on payday lending – here’s the press release and the polling memo. Austin and Dallas have already taken some action, both via zoning laws and via similar legislation to Bernal’s. The payday lenders have threatened to sue, but the good guys feel like they’re on solid legal ground. I hope Houston gets in the game soon as well. I share Bernal’s feelings on the matter, as expressed in that last Express News link, a column by Brian Chasnoff:

On Wednesday, after City Council members agreed to draft an ordinance to address the problem locally, Tim Von Kennel explained why the industry opposes Bernal’s efforts.

“We need to have regulation,” said Von Kennel, executive director for Consumer Service Alliance of Texas, an association of payday lenders. “And we’re advocating state regulation over municipal ordinances.”

I’ve already outlined what “state regulation” looks like at the Capitol, where money seeps into cracks and distorts laws.

As for why Von Kennel is averse to “municipal ordinances,” Bernal’s reaction to the circling sharks is enlightening.

I asked the councilman how he responds to lobbyists’ entreaties to consider the perspective of payday lenders.

“How do I say this?” Bernal responded.

He paused for a few seconds, presumably to craft a politic answer.

“I sort of tell them,” he said, “to go (expletive) themselves.”

You’re my kind of guy, CM Bernal. For a non-exploitative alternative to payday lending, see The Slacktivist.

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San Antonio Ordinance to Crack Down on Pay Day Loan Sharks

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Austin passed a simular ordinance back in March. Pay Day Loan Shops have been popping up everywhere […]