Texas is often called the “Wild West” of predatory lending, an anything-goes wonderland where payday and auto title loan businesses can charge low-income people vertigo-inducing fees whenever they desperately need a cash advance to, say, keep the lights on or make rent. Last week, payday lending groups filed a federal lawsuit in Austin that aims to ensure Texas remains a profitable place for the industry.
The two trade groups — the Consumer Service Alliance of Texas and the Community Financial Services of America, the largest national association for payday lenders — are suing to block new rules by the federal Consumer Financial Protection Bureau (CFPB) that advocates say would protect borrowers across the country from predatory lending practices, especially in Texas. The rules, finalized right before the CFPB’s Obama-appointed director stepped down last fall, would force lenders to verify people’s ability to pay back loans and limit the kind of rollovers for overdue payments that can trap people in a cycle of accumulating debt. The lawsuit calls the rules “draconian” and insists they would “effectively eliminate payday lending” across the country.
Advocates say the rules, initially scheduled for full rollout by summer 2019, are sorely needed to protect borrowers in a state that has largely failed to regulate the industry. Payday loans, which can carry an effective APR north of 600 percent in Texas, are pretty much banned in 15 states, but attempts to rein in payday lending practices here have floundered against a backdrop of regulatory and legislative capture. The biggest push to curtail predatory lending, in 2011, culminated in Representative Gary Elkins, a Houston Republican who owns a chain of cash-advance stores, defending the industry on the House floor in a sort of curdled version of Mr. Smith Goes to Washington. Elkins railed against watered-down rules proposed by a lawmaker who then went on to lobby for a payday lending company (a company that, it should be noted, later paid $10 million to settle allegations that employees “used false threats, intimidation and harrassing calls to bully payday borrowers into a cycle of debt”). Elkins’ payday lending stores were even among those that initially flouted the patchwork of local ordinances that frustrated cities began passing years ago to regulate an industry the Legislature will hardly touch.
After reforms failed at the Capitol, advocates focused on getting cities to pass modest regulations imposing limits on the size and frequency of loans. Meanwhile, they pinned their long-term hopes on the CFPB. Now, they fear the cities, at least in Texas, will be all on their own.
“To date, the Legislature hasn’t been willing to tackle this issue, and the loose state standards have created a local level crisis that cities can’t ignore,” says Ann Baddour with Texas Appleseed, an Austin-based nonprofit that advocates for the poor. She says the CFPB rule would expand “basic standards” for payday lending across the state, leapfrogging progress advocates have made with local ordinances. (Baddour also sits on a CFPB advisory board).
Baddour estimates the federal rules could have saved payday and auto title borrowers in Texas anywhere between $402 and $432 million in 2016, compared to the nearly $1.6 billion in loan fees collected by Texas payday and auto title businesses that year. While lawyers for the industry groups that sued the CFPB last week wouldn’t answer questions, including why the case was filed in Texas, it stands to reason lenders fear the rules will close a very lucrative open season in the state.
The federal payday lending rules appeared to be on shaky ground even before the lawsuit. Last November, Trump appointed his budget director, the former tea party Congressman Mick Mulvaney, to moonlight as the head of CFPB. Mulvaney spent much of his career in Congress railing against the agency as an imposition on the free market, so reformers aren’t exactly confident that he will protect Obama-era rules, much less the integrity of the agency.
Under Mulvaney, who once filed a bill to abolish the CFPB, the bureau has also dropped a case against online lenders who charge interest rates as high as 900 percent. Last week, Mulvaney even openly waged war on his own agency in hearings before Congress. The lawsuit may just be another nail in the coffin.
Baddour says that would leave local ordinances to fill the gap. She says she often gets calls from poor people struggling to understand the growing pile of debt they assumed in a moment of desperation. Last week, Baddour heard from a woman struggling to pay down the debt on $300 she borrowed from a cash-advance store in Humble, which has no payday lending ordinance. The woman had already paid more than $500 in fees but hadn’t touched the principal. Repaying the loan over five months cost $972, an APR of 484 percent.
In their lawsuit, the payday lending groups argue that these borrowers “fully understand the costs and risks of these products” but choose to use them anyway. They call regulations that limit lending practices “deeply paternalistic.” Baddour says that in arguing against rules designed to curtail the cycle of debt, payday lenders are actually revealing how central that is to their business model.
“They’re saying, ‘OK, we acknowledge essentially that this is a major part of our business model, but we think it’s good for people,’” Baddour remarked. “And if you’ve looked at any of these loan contracts, that assertion would be questionable at best. Frankly, it’s absurd.”