Dirty Paydirt
April 27th, 2007 at 10:42 am
The issue of predatory payday loans is one we haven’t touched on yet this session. Despite years of national attention, Texas law still allows for loopholes that allow payday lenders to charge excessive interest rates on short-term loans. Profit margins often trap borrowers into a spiral of debt, with low-income borrowers and military families being the most common victims. Buy, hey — no credit check!
Of course, that’s both the reason these lenders are so popular and why they are so predatory. The loans supposedly help cover financial emergencies or pay urgent bills until the next paycheck comes in — a one-time bail-out, in other words. This, theoretically, allows some borrowers to avoid ruining their credit, even if it means paying a typical rate of $15 of interest for every $100 borrowed. On a two-week loan, that works out to a friendly 391% APR. Military families have been especially hard hit, leading to federal legislation capping rates to service members and their kin at the equivalent of 36% APR.
Supporters of these profitable institutions claim they are important to serving the “underbanked” — a particularly poor attempt at newspeak — such as immigrants or people with no (or ruined) credit. Not surprisingly, consumer-rights groups see it differently.
Earlier this session, Don Baylor, with the Center for Public Policy Priorities, published an op-ed that describes how the industry actually makes its money off “trapped borrowers”:
High interest rates make it nearly impossible for workers to repay the loan on time. In fact, workers often have to borrow again just to pay off the interest on the first loan. One emergency can lead to a debt spiral, as payday borrowers take out an average of nine loans per year. The result? More loans, more debt and more bankruptcies.
The Center for Responsible Lending shows that this scenario is not a rarity but the industry norm. Their report says that in 2005, 90 percent “of payday lending revenues are based on fees stripped from trapped borrowers” and “the typical payday borrower pays back $793 for a $325 loan.”
According to the CPPP, only two bills, both by Eliot Shapleigh (D-El Paso), still have a shot this session. One would replicate the federal protection for members of the military. The other, SB 753, would basically try to recreate the research of the CRT. The bill would mandate a data collection system for payday lenders, including those that currently use the loophole to avoid state regulation. Admitting that we have a problem, even through committee reports, might be the first step toward a cure.
