Overview
Payday lenders prey on working consumers who live paycheck to paycheck, offering loans of as much as $1,000 against a future payroll or government benefits check. Typically, the consumer writes a check for $230 to borrow $200 for two weeks (usually their next payday). The actual cost of that loan for two weeks is $30, or an annual percentage rate (APR) of 390 percent. Some payday loans can end up costing consumers more than 900 percent.
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 vicious 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. Borrowers typically make 10 to 12 such transactions.
Payday loans were first regulated in Texas under industry-friendly rules adopted by the Texas Finance Commission in 2000. Lenders could loan as much as $500 and hold the borrower's personal checks to make sure the loans were repaid or refinanced. Lenders could charge a $10 per loan fee plus 48 percent annual interest for payday loans. For some loans, these terms could result in interest rates as high as 309 percent.
However, most payday lenders were not satisfied with those generous terms, so they exploited a loophole that allowed them to partner with out-of-state banks, which in turn enabled them to charge as much as they pleased.
Over the past few years, federal banking regulators and state representatives have attempted to rein in the payday lending industry. Federal banking regulators cracked down on the renting out of state charters, and Texas legislators blocked an attempt to codify the practice in Texas. These successes stopped far short of totally annihilating payday lending practices in Texas.
Instead of complying with the Texas small loan law or the payday loan regulations set by the Texas Finance Commission, the big payday lenders in Texas have found a new way to continue making loans that exceed state law rate caps.
The firms are now using 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.
