Predatory lenders thrive in Texas, where regulations are scarce on stores that offer payday advance loans and allow borrowers to put their cars up as collateral for high-cost, short-term credit. But a trio of bills being considered in the legislature would update state law to make it harder for desperate borrowers to wind up trapped in endless loan-renewal cycles when they turn to payday and auto title loans.
The bills would put a length limit on what lenders can offer, prohibiting unpaid loans from being rolled over more than three times. The industry’s profits depend upon borrowers who get stuck in much longer chains of loan renewals that drive the overall interest rate on the borrowing up over 400 percent APR, according to federal data.
Along with the duration cap on re-lending, companies would have to ensure that a customer pays down the principal amount by at least 25 percent each time they refinance a loan. The two provisions together would help tie loan terms to a borrower’s real income and timely ability to repay.
Such rules are unenforceable without having comprehensive data on who is borrowing what from whom. One of the Texas bills would create a state database to track lending. Payday lenders have fought hard against databases in other states like Alabama, lobbying lawmakers and filing suit to enlist judges in their efforts.
The bills have the backing of the local chapter of the AARP. A fifth of all customers at Texas payday and auto title lending shops are over the age of 50, according to the group, which has also published polls showing that three-quarters of Texans older than 45 say they strongly support tighter rules for the loans.
If the Texas laws pass, the two largest states in the country would likely be building payday loan databases at the same time. California regulators are introducing a new slate of rules for policing high-cost lending, including a database provision that would help the state to better enforce the rules that are already on the books.
“California limits you to one payday loan at a time, but there’s no way to enforce that because there isn’t a database,” Pew Charitable Trusts small-dollar lending expert Alex Horowitz told ThinkProgress, stressing that even a loan that complies with California law is still more expensive than should be allowed. “Databases have acted as a backstop in some states. But they’re not sufficient as regulation. Even with a database and with this proposal, most borrowers cannot afford to repay $300 in two weeks. For an average payday borrower, that’s a quarter of their gross income.”
While Texas’ proposed database is part of a crackdown on brick-and-mortar loan shops, the new California consumer protections are tailored to the digital age. The state wants to prohibit payday lenders from gaining access to borrowers’ bank accounts — a move that could drive internet-only lenders out of business, and decrease the price that low-income borrowers pay for desperation loans — and force them to rely on traditional paper checks as collateral. The regulators are also partnering with Google and Microsoft to make it harder for unscrupulous internet lenders to promote their products to California web users.
Pushing online lenders out of business should make for a less-abusive overall market for resource-starved families who need quick cash. “Interest rates online are generally higher than they are at storefront lenders,” Horowitz said.
Compared to the dozen-plus states that have made payday lending impossible in their borders, California’s current approach is moderate. Storefront lenders that register with the state have “loan sizes capped at $255, and fees capped at $45,” Horowitz said. Interest rates on such loans are still quite high, but far lower than the roughly 400 percent annual interest that lenders charge on average in less-regulated states.
Reform proposals for storefront lending in Texas and online lending in California illustrate the diversity of regulatory approaches that states pursue in the absence of national rules for lending that targets the poor. As the industry siphons billions of dollars per year out of low-income communities, federal neglect has turned efforts to protect consumers into a game of whack-a-mole in which lenders successfully lobby against most regulations. But all that will soon change, as the Consumer Financial Protection Bureau (CFPB) is preparing the first-ever national regulations to link lenders’ offerings to borrowers’ actual ability to repay the loans.
With its new regulations, the agency seeks to balance genuine consumer demand for emergency loans with the public interest in preventing the most predatory and abusive features of the traditional business model. While states like Connecticut and New York have sought to prohibit payday lenders from operating in any form, most Americans live in states like California and Texas that allow the businesses to exist while trying to legislate against their most abusive habits.
The forthcoming federal rules will attempt to replicate the most successful elements of those hybrid regulatory approaches, and impose new underwriting standards on lenders to prevent them from knowingly signing someone up for a loan they can’t afford to repay on time. The final rules are years away, but they will likely be modeled on the approach that states like Colorado take: limit the cost of these loans, prohibit the most egregious fine-print tricks lenders use, but make sure this lending remains economically viable so that desperate low-income people have somewhere to turn.