Foxes In the Henhouse
This article is the first in a series of stories called “The Poverty Business” about regulators and the industries that enrich themselves at the expense of Texas consumers.
The Texas Finance Commission is supposed to protect consumers from being plundered. The commission writes regulations for loans and lines of credit. When the commission was created in 1943, state leaders stated in the agency’s mission that it “enhance the financial well-being of the citizens of Texas.”
Instead, commissioners are enhancing the financial well-being of banks, mortgage and payday lenders and pawnshops. In just one year the payday lending industry makes more than two million loans in Texas, draining borrowers of more than $280 million in fees and interest payments. Representatives from the financial industries dominate the commission’s nine-member board. The chair, William “Bill” White, is vice president of public affairs for Cash America International Inc., one of the largest payday-lender and pawnshop chains in the country. Not one commission member represents consumers.
Most Texans probably have never heard of the Texas Finance Commission. But it wields the kind of power that affects every consumer who takes out a payday or car loan, or who applies for a second mortgage. The board, made up entirely of Gov. Rick Perry’s appointees, can interpret financial statutes and usury laws, and set guidelines on fees and interest rates for consumer loans. The members also appoint commissioners of three agencies: the Department of Banking, the Office of the Consumer Credit Commissioner and the Department of Savings and Mortgage Lending. These three agencies regulate myriad financial services, from examining the fiscal health of state chartered banks to loans from pawnshops and interest rates for secondary mortgages and car loans. Despite its low profile, the agency’s rule-making can have devastating financial consequences for Texas borrowers, as in the case of Valerie Norwood.
In 2004, Norwood, a disabled retiree living in Austin, took out a $58,000 home equity line of credit from the New Century Mortgage Corp. She paid seven points on the loan (a point is equal to one percent of the loan and is intended to lower the interest rate) for an adjustable-rate mortgage that started at 8.54 percent, according to court documents. She ended up paying $4,060 in total fees at closing, and her interest rate was still too high for someone on a fixed income.
Norwood didn’t realize it, but a rule made by the commission allowed her lender to ratchet up the fees on her home equity line. In 2003, the Texas Legislature passed a law allowing homebuyers like Norwood to take out lines of credit on their homes. To protect consumers, legislators capped fees at 3 percent—but left it up to the Finance Commission to interpret what qualifies as a fee. Shortly thereafter, the commission ruled that the 3 percent cap did not apply to most closing-cost fees. Under the cap, Norwood should have paid only $1,740 in closing costs instead of the $4,060 her lender charged. After being gouged on her loan, Norwood joined several other homeowners in a lawsuit against the commission over its ruling. Instead of working with consumers to lower excessive fees, the commission fought them in court.
In 2006, State District Judge Scott Jenkins sided with Norwood and the other homeowners, finding that the commission had made the state’s 3-percent cap “essentially meaningless.” The commission and the banking industry appealed the case with the 3rd District Court of Appeals in Texas and lost again. It’s now under review before the Texas Supreme Court. Whatever the outcome, the commission’s support of the industries it regulates won’t change unless state leaders do something about the agency’s board.
Perry, during his long reign as governor, has made a habit of appointing industry executives to the commissions that regulate them. His choice of Cash America’s White to head the Finance Commission is as egregious as they come. Perry appointed White to the board in 2004, then made him chair in 2009, where he’ll serve until 2016. According to Texas law, four of the nine commission members must represent financial industries.
The remaining five seats are reserved for the public, presumably to provide a voice for consumers. Under Perry, nearly all of these seats are held by lawyers and CPAs from corporate firms with clients in the financial service industries, with the exception of Paul Plunket, a former lobbyist for Oncor Electric Delivery. Seven members have contributed, either through PACs or individually, to Perry’s campaigns. Perry has received at least $15,000 from the Cash America International PAC since 2006, according to the nonprofit Texans for Public Justice.
Texas has been good to Cash America, which has 251 pawnshop and payday-lending businesses in the state. Recently the company announced that profits had increased to $81 million in the year ended last October from $63 million a year earlier. Cash America and other payday lending companies advertise heavily on street corners in low-income neighborhoods and offer easy cash on the Internet to borrowers in financial crisis. These “easy” loans carry jacked-up fees and exorbitant interest rates. In Texas, an eight-day payday loan carries a 1,153 percent annual rate—one of the highest in the nation. The average annual rate for loans in other states is 400 percent, according to the nonprofit Center for Responsible Lending. Borrowers find themselves trapped in an endless cycle of poverty, taking out new loans to pay for the ones they already have.
More than a dozen states call these exorbitant loans a form of “predatory lending” and have outlawed them. In Texas, payday lenders can charge as much interest as they want. The Finance Commission, which has the power to protect consumers from unfair loans, has made no attempt to rein them in.
Last session, state Sen. Wendy Davis, a Democrat from Fort Worth, filed a series of bills that would have stopped payday lenders from charging excessive fees and rates, only to see her legislation die in committee after a formidable lobbying effort by Cash America and other lenders. (White was a lobbyist for Cash America before he joined the commission in 2004. He’s no longer a registered lobbyist, according to the Texas Ethics Commission). Davis calls White’s appointment to the commission “the classic fox in the henhouse. It’s really disgusting that an industry that profits from the poor by charging 1,000-plus interest is put at the head of the state’s financial regulatory agency,” she says. “It’s saying, ‘It’s not only OK, but we’re going to put them in charge.’ ” Davis recently filed two reform bills for the current session and says she will fight the industry’s lobbyists “in the next session and the one after that until something passes.”
White says his industry’s loan practices aren’t predatory. “The fees are no more excessive than a bank’s overdraft charges,” he told the Observer. White says he doesn’t see his appointment as a conflict of interest. “I’m just one voice on a nine-member board.” He says there’s nothing his commission can do to rein in skyrocketing interest rates anyway since the payday-lending industry found a legal loophole that allows them to escape state regulation. “It’s up to the legislators,” White says, to pass legislation to close that loophole.
In 2005, payday lenders found the loophole, which is unique to Texas law, allowing them to register their businesses as “credit services organizations.” Ironically these groups are supposed to help consumers repair credit and provide counseling to consumers. Now the only requirement is a $100 license fee with the secretary of state, and payday lenders can charge any interest rate they choose. Meanwhile, the Finance Commission has watched the state’s predatory lenders escape regulation. Sen. Davis, who authored legislation last session to close the loophole only to watch it die under intense lobbying, says White isn’t motivated to help consumers. “He wants to maximize profits for his company and keep them in the loophole,” she says.
While White says his commission is powerless to act on the loophole, he adds the agency is always willing to listen to consumer complaints or suggestions during hearings they hold six times a year. “We have a portion of every meeting open to the public. And once we start the formal agenda, we take testimony. That’s two opportunities for the public to speak. As far as I am concerned we’ve never said we were unwilling to talk to anybody,” he says.
If the commission is listening to consumers, it’s not doing much to protect them. It may be up to the Legislature to close the loophole, but there are still many things the agency could do, including hearings on predatory lending practices and interpreting the Texas Constitution’s usury laws in a way that protects consumers. It could even draft resolutions in favor of closing the payday-lender loophole.
The agency hasn’t done any of those things. It hasn’t even collected data to see whether payday lending is hurting low-income communities. Commissioners have a duty to take action when consumers are being hurt, including asking the Legislature for help, says Robert Doggett, who serves as lead attorney in the homeowner lawsuit against the commission. “They sure didn’t mind passing a resolution to ask the Legislature to change the (home equity) law to help lenders.”
With Perry recently re-elected, the commission is unlikely to change its industry bias unless the state Legislature forces it to change. Republican state Rep. Burt Solomons of Carrollton has worked with the commission on legislative issues over the years as a member and chair of the House Financial Institutions committee. He says the commission “needs to have a voice for consumers on the board.” Last session, he introduced an amendment to appoint two consumer seats to the commission. “The one thing that is very noticeable is that they always take the position of the industry,” he says. “They interpreted the home equity laws and were sued over it because they took the position of the lending community.”
Solomons’ amendment stipulated that the consumer representatives not have business dealings with the industries they regulate. He offered the amendment to a bill by Republican state Rep. Dan Flynn of Canton, who is also a banking executive, that would have added another banking seat to the commission. After accepting Solomons’ amendment, Flynn declined to ask for a vote, allowing the bill to die. “Mr. Flynn pulled it down because the banking industry or whoever was interested in the issue didn’t want to do it, which brings up the question ‘Well, why not?’” Solomons says. “It’s obvious they didn’t want to do anything that had the word ‘consumer’ in it.”
Solomons may try again this session to add the two consumer advocates to the commission. He’s not fired up about fighting the commission and its industry supporters this session, when there’s a $27 billion budget shortfall. “We’ve got a lot of work to do this session,” he says. “I thought it was a good idea at the time, and I still do.”
It’s doubtful we’ll be hearing or seeing much of the Texas Finance Commission in the hearing rooms of the Legislature. On the final day of the last session, the commission had itself exempted from the legislative appropriations process and its grueling public hearings. Drew Darby, a Republican state rep from San Angelo, tacked the lengthy proposal onto legislation carried by fellow Republican Rep. Vicki Truitt of Keller during a conference committee meeting. In the frenzy of the session’s final hours there’s little time to ponder the fine print. With the commission’s newly independent status, it will only submit a yearly report to the Legislature instead of seeking regular appropriations. This legislative session, the Finance Commission won’t have to submit itself to public scrutiny. The industries they regulate prefer it that way.
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