Friday, November 30, 2012

Payday Lenders Looking for Loopholes - and Finding Them!

The story goes that W.C. Fields, who made no pretense of being religious, was visited in the hospital by a friend who found Fields in bed reading a Bible. Fields was very ill, in fact many feared that he was dying. The friend asked, 'Fields, what are you doing reading a Bible?!'
Fields replied, 'Looking for loopholes!'

In Texas, payday lenders are experts at looking for loopholes - and finding them!

A few months ago, I wrote a column in the Dallas Morning News about the need for more stringent oversight of the payday loan industry, particularly regarding it's compliance with Dallas' local ordinances, the laws passed in the last session of the Texas legislature and industry 'best practices'. Ann Baddour of Texas Appleseed and I were also guests on 'McCuistion', a local public televisoin talk show, where discussed the very same thing with Rob Norcross, lobbyist for the Consumer Service Alliance of Texas.

Finally, this past summer, I was interviewed about the hardships of low income consumers caused by a chain of auto title lenders who are transferring existing looans to the suburbs in ourder to circumvent compliance with Dallas' regulatroy ordinances.

This isn't made up stuff! Nor is it rampant speculation. Consider this report from Forrest Wilder, writing for the Texas Observer...

"One day a few weeks ago, on my way to work, I walked into a Cash Store near my house in East Austin and took out a $1,500 loan. I wasn’t broke, but I sure would’ve been if I hadn’t later canceled the loan. Thankfully, Texas law allows you to cancel a payday or title loan within 72 hours, without penalty. Otherwise, repaying it in 10 installments over five months, fees, interest and principal amounted to $2,362.23—an effective APR of 612 percent. My motivation was journalistic curiosity: What is the retail experience of a typical payday loan customer? How easy is it? As easy as, say, buying a TV or toaster oven? Would there be a high-pressure sales job? Would it be hard to figure out what I was getting into?"

"I picked the Cash Store—a medium-sized, Irving, Texas-based chain with five locations in Austin and 133 statewide—at random. Cash Store is owned by Trevor Ahlberg, a major Republican donor who lives in Irving and enjoys big-game hunts around the world."   "The store I visited is located in a busy shopping center anchored by an HEB supermarket. The interior was clean and sparsely appointed. A trio of well-groomed young Hispanic women were stationed at partitioned stalls, like tellers in a bank.""Within 45 minutes, I had $1,500 in twenties counted out to me, arranged like a fan on the counter. The first payment of $408.72 was due in two weeks. I left the store with the money, but I was also confused. I had gone in looking to take out a payday loan but had left with something else."

"“We don’t do a payday loan,” the Cash Store employee told me when I asked for one. “It’s an installment loan.” Indeed, small taped-up signs in the store stated that the Cash Store doesn’t offer “deferred presentment transactions”—the technical term for payday loans—at its Austin locations. Moreover, the employee told me that they were “pretty good about loaning up to half of what you make in a month.”"

"The total amount they were willing to loan me was, in fact, more than twice my monthly income, despite a recently enacted ordinance passed by Austin City Council that explicitly limits the amount of a payday loan to 20 percent of monthly income. The ordinance also prohibits payday shops from offering installment loans that include more than four installments—an attempt to slow down the cycle of debt many consumers get into with these loans."

"Also: I was never provided with a newly required disclosure form that explains in plain English how much the loan costs, compares it to other types of credit and provides contact information for the state Office of Consumer Credit Consumer Commissioner."

"As serendipity would have it, I had stumbled onto the latest mutant creature in the wild and wooly world of Texas payday lending. “What you’ve come across is really important,” said Ann Baddour of Texas Appleseed, an Austin-based group that advocates for social and economic justice. “It looks like they have found a loophole within a loophole,” one that allows Cottonwood Financial (d/b/a Cash Store) to escape new, albeit meager, licensing and disclosure requirements passed by the Texas Legislature as well as more stringent rules adopted by Austin, San Antonio and Dallas."
"(Ahlberg did not a return a voicemail left at his office. The Texas payday industry’s main trade association, the Consumer Service Alliance of Texas, also did not reply to requests for comment.)"

"What’s different about Cash Store’s loans versus a “regular” payday loan? Instead of signing a postdated check for the amount due, like you would in a true payday loan, the Cash Store had me sign a photocopy of a blank check. That small change apparently has magical powers. Voila! Not a deferred presentment transaction, not a payday loan, not a credit access business, and apparently not subject to Texas regulations."
"Experts I consulted said the arrangement looked legal on its face, but raised troubling questions about the state’s convoluted and extraordinarily lax legal apparatus surrounding payday and title loans. (You can view my contracts here.)"

"“There are new products in the payday and auto-loan field that raise questions,” said state Sen. John Carona, a Dallas Republican who chairs the Senate Business and Commerce Committee. “These approaches appear to skirt local ordinances as well as state law. Carona said he would consider filing legislation to address the problem next year."

"Leslie Pettijohn, the head of the state Office of the Credit Consumer Commissioner, warned Carona’s committee in October that attempts to circumvent the new law “threaten the whole integrity of our system of interest rates and usury laws.”"

I've said it before, I'll say it again: there's something wrong with a business model that depends on exploitation to make profit!

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