At the Texas Municipal League’s annual convention in Austin on Thursday, there was an unexpected bit of wargaming. City officials from across the state gathered to encourage each other to pass regulations on payday and auto-title lending, an unregulated sector many consider usurious, if not predatory, and to discuss ways to defend against the industry’s lawsuits.
In recent years, at least ten Texas municipalities — from Dallas, Austin, San Antonio and El Paso, to smaller cities like Denton, Balcones Heights, Somerset and Flower Mound — have passed restrictive ordinances on short-term lending businesses. Those have been effective at squeezing predatory lending operations within cities, but because lenders can simply hop over city lines and resume operation, the local efforts were also seen as a way to pressure the state to act.
Awash in industry money, the Legislature has failed to do much of anything for three sessions. This year, a big reform package, which traded local regulations for a looser statewide framework, dramatically imploded. Short-term lending reform advocates have now moved on to a new strategy: passing local ordinances wherever possible. But the industry has been sue-happy. And though cities have been winning the lawsuits, the threat of a financially-burdensome legal challenge is a challenge for small towns.
The conference panel on Thursday was an opportunity for city officials from around the state to share advice and encouragement. The panel included Austin City Councilman Bill Spelman and legal advisors from Austin, Denton and El Paso, three cities that have enacted tough payday lending rules and faced legal action from the industry.
Jerry Drake, a deputy city attorney from the city of Denton, reminded cities not to enact the ordinance without being able to clearly demonstrate a governmental need to restrict short-term lending.
“I just want to add a word for cities that are considering this: Be sure not to take the harm as a given. These payday lenders fully believe they’re doing the Lord’s work,” he said. “They say they’re filling a need. They have studies they’ll give you from economists with all kinds of very high-powered economic formulas in them, that you can’t even begin to parse, saying that the industry is such a good thing for the community and people of modest means.” Do your homework, he said, and come prepared.
But another message came from the panel, and advocates in the crowd — the more cities that enact payday ordinances, the better protected they’ll all be.
“From the payday lender’s point of view, suing Dallas is a no-brainer. It’s going to be easier for them to carry the cost of that lawsuit than the city of Dallas,” said Austin City Councilman Spelman. “But if 10 or 20 or 30 cities that are all passing the same ordinance, and they want to sue all of us, that’s a whole bunch of money. They’re going to throw in the towel and wait for one or two of those lawsuits to bear fruit.”
“If you’re the eleventh city to pass one of these things, the chance they’re going to fixate on you and spend as much time and trouble suing you as they are suing Dallas or suing us is pretty low,” he said. “Because it doesn’t make economic sense.”
Jerry Allen, a city councilman from Dallas, a city which has had success in defending payday lending regulations in court, agreed. “Just join together — we don’t need the state,” he said.
Afterwards, Allen doubled down. “Do not hesitate. Get out there and do it,” he said. “Every single city needs to join in and join in today.” In Dallas, he said, “there has not been one single payday lender or auto title lender that has applied for a new permit” since 2011, when the city enacted its ordinance. “We’ve stopped the flow.”
Spelman expressed optimism that the panel would encourage smaller cities to enact the ordinance. He told one story about the Austin ordinance he helped pioneer. A woman who had taken on short-term loans came to the city with concerns about her contract, and the lender responded by reassigning her contract to a storefront in Buda, outside of Austin’s city limits. After the panel, Spelman said, officials from Buda contacted him to talk about enacting an ordinance.
“Of course, if they do that, [the company] will move it to Pflugerville or Cedar Park instead,” Spelman said. “But, I think there are a lot of other cities that will adopt similar ordinances. At some point, I think, we’ll have sufficient coverage over the entire state that the Legislature is going to have to adopt the same level of statute.”