As some local governments in Texas enact stricter consumer protections on payday and auto title lending, the 84th Legislature may consider similar proposals in 2015.
A payday loan is a small cash advance delivered to consumers who agree to repay the principal and associated fees by a specified date, typically the consumer’s next payday. Consumers often provide a post-dated check or access to their debit accounts as collateral. Some payday loans are structured as multiple-payment transactions, and lenders may allow consumers to delay repayment in return for extra fees. One fast-growing sector of the industry is online payday lending.
Auto title loans are similar products. They require a car title as collateral, allowing a lender to repossess the car if the borrower defaults. Texas auto title lenders repossessed about 37,000 cars in 2013, according to the Office of Consumer Credit Commissioner.
Federal. The federal Military Lending Act (MLA) puts a 36 percent cap on the interest rates and certain other fees that payday and auto title lending entities may charge certain active-duty service members and their families. Because some of these businesses have adjusted their loan structures to fall outside the MLA’s regulatory framework, the Department of Defense has proposed rules to broaden the applicability of the act.
The federal Consumer Financial Protection Bureau is considering whether to develop rules that would regulate the payday lending industry for all consumers.
State. A payday or auto title lender in Texas is regulated as a “credit access business” (CAB). CABs offer credit to consumers but do not have to follow the same rules as traditional lenders, such as banks or credit unions. Texas law does not limit interest rates, fees, or refinances of loans issued by CABs, nor does it cap the amount a consumer may borrow based on income. CABs are regulated by the Finance Commission of Texas, including the Office of Consumer Credit Commissioner, under administrative rules authorized under Finance Code, chapters 342 and 393.
In 2011, the Texas Legislature enacted two laws to regulate payday and auto title lending. HB 2592 and HB 2594 by Truitt require CABs to disclose information conspicuously about fee schedules and refinancing charges and to register with the Office of Consumer Credit Commissioner. The 82nd Legislature also considered, but did not enact, HB 2593 by Truitt, which would have limited the amount a consumer could borrow based on family income, restricted the number of times a loan could be renewed or refinanced, and allowed borrowers to make partial payments toward the principal loan amount.
In 2013, the 83rd Legislature considered SB 1247 by Carona, which is similar to HB 2593. SB 1247 was left pending after a hearing in the House Investments and Financial Services Committee.
Local. At least 18 cities in Texas have imposed stricter regulations on CABs. Several have adopted a unified ordinance requiring that:
- CABs register with the city;
- consumers borrow no more than 20 percent of their gross monthly income (for payday loans) and 3 percent of their gross annual income or 70 percent of the car’s value (for auto title loans); and
- loans consist of no more than four payments, each of which must reduce the principal by at least 25 percent.
Supporters of stricter statewide regulation say it would help to limit potential harms to consumers from the business model of CABs in Texas, which allows lenders to evade the state’s usury laws, including caps on interest rates and fees. They say payday lenders profit from exorbitant fees to renew the loans of economically desperate borrowers who are unable to pay on time. Borrowers may become trapped in a cycle of debt after repeated loan renewals, supporters say, and those who lose their cars after defaulting on an auto title loan may have trouble getting to work and earning a living. Alternatives such as community loan centers are emerging to meet the needs of those with limited access to credit.
Supporters say additional state-level consumer protections would help prevent payday and auto title lenders from sidestepping city ordinances. In addition, they say, online payday lending exists in a regulatory gray area and tends to cost even more than storefront loans. Clear statewide regulation is needed to protect consumers of both online and storefront payday lending.
Opponents of stricter statewide regulation say further restrictions on CABs might force them to close rather than comply, making loans less available to people who need them. Many Texans struggle at times to pay their bills, and payday and auto title lending provide access to credit for those with few realistic choices, opponents say. These loans tend to be the least expensive option for short-term loan consumers. Without such options, some who are struggling might suffer financial harm by paying their bills late or overdrawing their bank accounts.
Opponents say excessive regulation might hinder innovation in the Texas marketplace, potentially raising costs for the industry and prices for consumers. Certain consumer protections may be appropriate but should not limit choice or availability for the millions of Texans who need these loans and are able to repay them on time. State lawmakers have consistently rejected policies that would distort competition or fix prices in the payday lending marketplace.
by Mary Beth Schaefer