Proponents of payday lending say the practice offers cash-strapped consumers help in emergency situations. But they ignore the fact that far too many people get trapped into a revolving cycle of loan after loan. Payday loans almost always create more financial trouble for consumers than they solve.

Consumers desperate enough to visit a payday lender often find there's not enough money on payday to cover the loan and all the fees, and still make rent or put food on the table. No problem, the payday lender is happy to "roll it over," for a new fee, leaving the borrower owing most or all of the $230 at the end of the next transaction. That brings the total finance charges for a $200 one month loan to $60. That's exactly what payday lenders bank on. This is a onetime transaction for very few people; in states where this stuff is legal, borrowers typically make 10 to 12 such transactions.

Payday loans are regulated in Texas under industry-friendly rules adopted by the Texas Finance Commission in 2000. Lenders can loan as much as $500 and hold borrower's personal checks to make sure the loans are repaid or refinanced. Lenders can charge a $10 per loan fee plus 48 percent annual interest for payday loans. For some loans, these terms can result in interest rates as high as 309 percent.

However, most payday lenders aren't satisfied with those generous terms, so they exploit a loophole that allows them to partner with out-of-state banks that allow them to charge as much as they want.

Federal banking regulators have started to crack down on payday lending. Most federal regulators no longer permit the banks to "rent their charters" for payday lending. Only the Federal Deposit Insurance Corporation has permitted state banks to engage in payday lending. Now that arrangement is under threat, because of new limits recently announced by the agency, and the payday lenders are pulling out all the stops to legalize a practice in Texas before their federal loophole closes.

Thanks to a procedural maneuver by Rep. Trey Martinez-Fischer, backed by a coalition of consumer, religious, military and civil rights groups, the payday lenders failed to pass HB 846 by Rep. Dan Flynn (RVan). The bill would have codified business as usual and allowed the lenders to evade new federal standards.

Instead of complying with the Texas small loan law or the payday loan regulations set by the Texas Finance Commission, and having failed to win authorizing legislation at this year’s Texas legislature, the big payday lenders in Texas have found ways to continue making loans that exceed state law rate caps.

The firms plan to use unregulated Credit Service Organization status in Texas as a way to evade new federal guidelines. The Texas Credit Services Organization (CSO) Act permits companies to act as loan brokers. These CSOs are not licensed by the Texas Office of Consumer Credit Commissioner and their fees are completely unregulated. More.

In the news
Evacuees In Dallas: Broke and homesick 9/26/05
Payday lenders banking on new state law
Bill would encourage predatory lending in Texas
Consumers see few pocketbook victories

Testimony
Testimony of TexPIRG Advocate Luke Metzger to the House Financial Institutions Committee In Opposition to CSHB 846