Texas payday lenders face tougher standards with new federal rules
Gordon Martinez turned to a payday lender over 10 years ago and took out a loan of $ 1,200. The former teacher had just moved to Dallas to start a career in sales and was struggling to make his rent. But with high fees, his debt swelled to around $ 3,500 in a matter of months.
“I didn’t have a chance to repay,” Martinez said. “I was doomed to failure.”
New rules adopted last week by the Consumer Financial Protection Bureau place strict restrictions on payday loans and auto loans, like those used by Martinez. The rules – which are expected to be fully implemented in summer 2019 – would ban lending without verifying a client’s ability to repay the loan.
In Texas, a state where payday loans are largely unregulated, proponents of increased scrutiny see the new rules as a crucial step in protecting vulnerable borrowers. Ann Baddour, director of the Fair Financial Services Project at Texas Appleseed, a nonprofit advocacy and research group that has pushed for increased regulation, said the rules ensure payday lenders don’t go after to borrowers who they know cannot repay their loans.
“TThese rules are transformative because they assert a clear standard that underwriting must be part of any credit, ”Baddour said. “Supported by the basic principles of fair and responsible lending”.
But others say the new rules limit the access of underbanked Texans to short-term credit.
US Representative Roger Williams, R-Austin, said in a statement that the new rules “punish vulnerable Americans.” Williams, who is deputy chairman of the House of Commons Financial Services Committee’s monetary policy and trade subcommittee, said the rules removed “the right to small emergency loans.”
“Washington bureaucrats will never experience the financial instability that many of our hard working families experience. We need to fix this system by removing the regulatory power of this agency, whose decisions are guided by “scholars” rather than experts in the industry and the field, “he said.
Payday loans, which are already effectively banned in 15 states, involve clients who take out small amount loans with very high fees. Customers are expected to reimburse the fees and principal amount often before their next payday. However, prohibitive fees often cause debt to be carried over to the next month, which critics say causes a cycle of debt.
The new federal rules cover a scope of lending practices that advocates have called predatory – businesses must now verify a customer’s ability to repay loans before issuing them and cannot withdraw money directly from the account current from a customer without prior written notification. The new rules also limit carry-overs for late payments.
Compared to other states, short-term, high-repayment loans like Martinez’s have few restrictions in Texas, and many say they are a debt trap for middle- and low-income Texans. About 8% of Texans have taken out payday loans, compared to a national average of 5.5%.
More than 40 municipalities in Texas have passed ordinances restricting the expansion of short-term lending agencies. Yet state laws governing payday lending practices have largely failed in the state legislature. In 2013, a bill that would have reduced many practices deemed predatory failed because lawmakers could not agree on the regulatory details.
Rudy Aguilar, director of consumer protection at the State Office of the Consumer Credit Commissioner, which regulates payday lenders, said the office is still reviewing the new rules and cannot comment.
Payday lenders say they offer services to customers turned down by big banks.
“While the rules announced today by the [Consumer Financial Protection Bureau] potentially only affect a small fraction of our total income, these rules are extremely complex for a small dollar loan and, by their own estimate, will have a significant impact on consumers’ already limited access to credit, ”Nannette Blaylock , executive director of Curo Financial Technologies, which operates payday lenders such as Speedy Cash in Texas, said in a written statement.
Martinez, however, said the loans are not designed to help borrowers.
As his payments continued to rise, the fees eventually exceeded the bills and rent he initially needed help paying, he said. Martinez said the lender had withdrawn money straight from his checking account, and with fees skyrocketing, withdrawals ultimately increased more than his income.
In order for Martinez to notify the lender that he would not be able to make the payment, he said he was ordered to call the company two days before the scheduled withdrawal date. But he said when he called, no one would answer.
Martinez said financial pressure had led him to part ways with him and his wife. He couldn’t pay the rent, he said, and lost his house.
Baddour said the payday loan industry is designed to profit from maintaining customer debt.
“It does say something when a loan company complains about a standard that simply requires assessing the borrower’s repayment capacity, which should be a basic principle of a reasonable and fair loan,” he said. she declared. “It definitely gives a break.”
Martinez called the new rules a “good first step,” but said they did not place adequate caps on interest and fees, which Martinez said caused his payments to spike out of control.
Although Texas usury laws protect borrowers from annual interest rates of more than 10%, payday loan fees are not capped, said Kathryn Freeman, director of public policy at Christian Life. Commission, which advocated for the new rules.
Martinez said that with “good financial planning” and the support of his church, he is “in a better position now”. Yet he continues to help those caught in a cycle of debt and advocates for tighter regulation, he said. His experience prompted him to work with Faith in Texas, a multi-faith social justice nonprofit, to advocate for interest and fee caps.
“We can’t stop now,” Martinez said. “Now there is something suitable for the 50 states, but we have to do what is suitable for Texans.”
Disclosure: Texas Appleseed financially supported The Texas Tribune. A full list of Tribune donors and sponsors can be found here.