Andrew Wheat

“I did all I can do and I can’t get along with you. I’m gonna take you to your mama, payday.” —Mississippi John Hurt

Federal regulators are cracking down on banks that help pawn shops and check-cashing stores dodge state usury laws on “payday loans.” These short-term, very high-interest loans are controversial because they trap wage workers in spirals of debt. Maryland and North Carolina have outlawed payday loans outright. While prohibition has not come to Texas, even this state’s regulators have limited interest rates on these loans to a maximum of around 570 percent (the rate varies with the loan’s size and duration). The industry–which makes loans with annualized interest rates of 1,000 percent in some states–howled when the Texas Finance Commission proposed these limits in 2000. “The risk associated with a payday loan under these proposed rules,” one lender griped, “is just greater than the reward of the rate you can charge.”

To circumvent such state rules, payday lenders teamed up with federally chartered banks that can legally thumb their noses at state laws. This year, the federal Office of the Comptroller of the Currency (OCC) cracked down on some of the banks that help payday lenders evade state usury laws. In October, the OCC ordered California-based Goleta National Bank to stop making payday loans through the stores of Irving, Texas-based ACE Cash Express, the nation’s largest check-cashing company. Regulators accused Goleta and ACE of unsafe lending practices, fining Goleta $75,000 and ACE $250,000.

Payday loans are also controversial because a grossly disproportionate share go to minorities. A recent hearing by the Texas legislature on that very issue wound up shedding more light on the loan sharks than their victims. Senator Eliot Shapleigh, who plans to introduce a bill next year to close the federal bank loophole, asked hearing witnesses to explain the disparity. Was it outright lender discrimination? Or did minorities somehow pose greater credit risks than Anglos–even when you control for differences in income? Senator John Carona–who championed the cause of predatory lenders in the last session–said, “I would love to see some people be blunt enough to begin to answer some of these questions.” The only witness to take the Carona challenge was banker Ron Abbott, CEO of People’s National Bank of Paris, Texas, who gave the senators a crash course in loan shark anthropology.

“God made us all different,” Abbott explained. “Some people have weaknesses and some people have strengths. There are entrepreneurial spirits who are alive and well that cause [people] to go out and invent things and grow things. There are cultures that are athletically inclined; there are cultures that are intellectually inclined. There are cultures that if they see a piece of trash over there on the floor they’ll go over and pick it up. There are cultures that don’t care if that whole trash pile lies out over there. And so we have to recognize that in Texas we have a diverse culture and we must deal within those cultures to see that those cultures are treated fairly with fair access…to credit.” (People’s National Bank may have been a little overeager in granting such “access.” A day after professor Abbott testified, his own bank was accused by the OCC of endangering its stability by making too many high-risk payday loans.)

Given a little more rope, Abbott went on to explain the mind-boggling variables that, in his estimation, determine a borrower’s creditworthiness. “We are colorblind as to credit scoring, but we need to go beyond credit scoring,” he said. “We need to give people the ability to analyze the credit score and then factor in a person’s character. So that in these areas of town, in these different economic cultures of people, the same credit score can’t apply for one group that applies for another. You have to have people who’ll look at it with fair, objective minds as to: Who I’m dealing with? What’s their culture? What’s their nature? And it’s not something a computer can do.” Indeed, if computers were in charge, minorities would get a fairer shake. Fannie Mae, the government-backed low-income lender, estimates that half of all sub-prime borrowers would qualify for loans with non-predatory interest rates if they bypassed the loan sharks.

At the Lincoln Memorial four decades ago, Martin Luther King, Jr. dreamed that, “my four children will one day live in a nation where they will not be judged by the color of their skin but by the content of their character.” Today, King’s children can walk into a small-town Texas bank and be judged by the content of their character and the color of their skin. What wonders might another 40 years bring?

Andrew Wheat is research director of Austin-based Texans for Public Justice.