Payday loan industry pushes back on Texas legislation

Inside Subprime: April 18, 2018

By Kerry Reid

When it comes to federal regulations on payday loans, lenders in the Lone Star State are saying “Don’t mess with Texas.”

On April 9, two trade groups for the Texas payday lending industry – Community Financial Services of America and Consumer Service Alliance of Texas – jointly filed a 38-page lawsuit in Austin federal court against the federal Consumer Financial Protection Bureau over an Obama-era regulation that the plaintiffs say would wipe out the industry.

The CFPB under fire.

As reported by Erik De La Garza in Courthouse News Service, the regulation in question restricts payday loans to borrowers who can demonstrate an ability to afford the debt on top of existing financial obligations. It also imposes a three-time limit on how many successive loans a borrower can take out, along with a mandatory 30-day “cooling off period” between loans. Mick Mulvaney, current head of the CFPB who is also named as a defendant in the suit, has said previously that he is reviewing the regulation, which was initially scheduled for rollout in summer of 2019.

The lawsuit, according to De La Garza’s report, claims that the CFPB regulation violated the federal Administrative Procedure Act, under which regulations are instituted, and is thus unconstitutional. They seek an order prohibiting it from taking effect.

The suit is the latest development in an ongoing battle that has, in recent years, caused many cities in Texas to impose more regulations on payday loans in response to lack of action from the state legislature.

A payday loan’s interest rates can hurt consumers.

In an article for the Texas Tribune last April, reporter Jackie Wang noted that nonprofit advocacy groups, such as Texas Appleseed, have been working on payday and auto loan lending reforms in cooperation with cities and faith-based organizations since Dallas passed the first local ordinance regulating the industry in 2011. An auto loan, or title loan, allows a borrower to put up a vehicle as collateral. The lender then gets temporary title and a lien on the vehicle and can repossess it in the event of the borrower defaulting on payments.

Ann Baddour, director of the Fair Financial Services Project at Texas Appleseed said in Wang’s article that, “these ordinances passed in at least 42 cities through incredible local efforts from faith leaders, city leaders, nonprofits and some in the business community. A lot of businesses saw how these loans affected their employees.”

In a recent article for the Texas Observer, Michael Barajas noted that payday loans “can carry an effective APR north of 600 percent in Texas.” Yet a push in the state legislature in 2011 to curtail some payday lending practices failed.

Can local regulation work?

At the same time, efforts at the state level to overturn local ordinances aimed at payday lending institutions have also failed. Last year, State Senator Craig Estes (R-Wichita Falls) introduced Senate Bill 1530, which, as noted in Wang’s article, would have nullified all city ordinances related to payday and auto title lenders. That bill effectively died in committee, as did a similar bill introduced in the Texas House by Republican State Representative Giovanni Capriglione.

In the absence of statewide action to either expand upon or curtail local ordinances, the payday lending trade groups and the reform advocates will both be watching the lawsuit against CFPB closely.

In the Observer article, Baddour estimates that the federal rules could have saved payday and auto title borrowers in Texas in the range of $402-$432 million in 2016, as opposed to the nearly $1.6 billion in fees collected that year by those in the business. However, as quoted by the Observer, the plaintiffs in the suit maintain that borrowers “fully understand the costs and risks of these products” and called attempts to limit these lending practices “deeply paternalistic.”

The ball is now in the federal court.

To read more about payday loans in Texas, check out these related pages and articles from OppLoans: