State Regulators Issue a Warning to Rogue Payday Loan Shops

Following the Observer‘s reporting on a Texas payday lender’s scheme to circumvent state and local rules meant to protect consumers, state regulators issued a stern warning last week.

My story centered on the Cash Store, an Irving-based payday chain owned by a major GOP donor. In October, I took out a $1,500, 612-percent-APR loan from a Cash Store location in Austin and discovered that the company had engineered a new mutant loan product—one that the company believes isn’t technically a payday loan and, therefore, doesn’t have to follow any of the city or state rules on such loans. The Cash Store is peddling this loan at the four stores we checked in Austin, Houston, Dallas and San Antonio.

Now, the Office of the Consumer Credit Commissioner is warning the payday and title loan industry in Texas away from such schemes.

“Continued use of the practice could result in the Texas Legislature taking adverse action in the upcoming legislative session and could also lead to civil liability on the part of the [business],” the agency wrote in a bulletin posted on its website last week.

The OCCC asserts that the practice “conflicts” with what the Legislature intended when passing two reform bills last session, and lawmakers could view a company’s actions (the bulletin doesn’t mention the Cash Store directly) as “a subterfuge intended to circumvent” the law.

Notably, the agency didn’t challenge the authority of Austin, San Antonio and Dallas to regulate payday lenders in the bulletin. The industry has been up in arms that local leaders have taken matters into their own hands by passing fairly stringent ordinances. Faith leaders, consumer advocates and others have successfully pressed many of the state’s big cities to do what the Legislature has not: Pass measures that attempt to reduce the predatory practices of the state’s booming, virtually unregulated payday and title loan industry. According to documents obtained by the Observer, payday and title companies have been aggressive in pushing OCCC to call off the cities.

Bill White, the chairman of the Texas Finance Commission, which oversees OCCC, instructed credit commissioner Leslie Pettijohn in August 2011 to push back against Austin’s proposed payday ordinance, according to an email. White is notably also a senior executive with Cash America, International, a Fort Worth-based company that operates pawn shops, check-cashing services and payday loans.

“Per Sunday’s Un-American Statesman [sic], the Austin City Council is following Dallas [sic] lead in proposing their own regulation of payday loans,” White wrote to Pettijohn. “Please have your troops inform them that even Austin doesn’t supersede State [sic] law.”

Pettijohn wrote back: “We have reached out to the City Attorney’s office trying to educate and inform.” (Austin passed an ordinance restricting how much payday and title lenders can loan consumers last year.)

Earlier that summer, White wrote to Pettijohn that the Dallas ordinance “overreached into OCCC territory.”

This echoed almost precisely the stance of the Consumer Service Alliance of Texas, the industry association representing the majority of payday and title businesses in Texas.

In a July 2011 email from Alex Vaughn, Cash America’s vice-president of governmental affairs, to Finance Commission Vice-Chair Paul Plunket, Vaughn wrote, “The industry believes the city [of Dallas] has over reached and intends to take the issue to court. We also believe it is under the preview [sic] of the OCCC…”

That email also includes a detailed run-down of the industry association’s media, legislative and legal strategies to attack the Dallas ordinance.

Pettijohn, the email stated, “is trying to decide what approach to take directly with the city concerning enforcement of the ordinance. In the past, depending on the ordinance, the Commissioner has taken a hard line with the respective city and informed them they had no authority to do what they planned to do and would receive no assistance from her office. In other instances, she has offered to cooperate on enforcement and data collection issues to alleviate possible duplication of effort. Obviously we we would prefer to do everything we can to assist her with her department’s independent legal analysis of the issues involved.”

Having failed to convince Austin, Dallas and San Antonio to drop their ordinances—all three city councils overwhelmingly approved measures to restrict payday and title lenders—the industry may be turning to the Legislature in 2013. The Legislature could, for example, decide to pass its own weaker reform package “pre-empting” what the cities have done. According to Pettijohn’s handwritten notes of a January meeting between her and CSAT head Rob Norcross, Pettijohn lists three “things we can work out.” The second one is an “agreement on preemption language for 2013.”

Austin City Councilman Bill Spelman says his best guess is that the industry will try to persuade the Legislature to pass weak legislation and then claim it preempts the more progressive efforts of the cities.