With legislators convening in Washington and Austin, the next few years could be make-or-break for Texas’ $5.8 billion payday loan market. In Washington, the industry’s future could hinge on whether Donald Trump fulfills a pledge to gut the Consumer Financial Protection Bureau. In June, that federal agency proposed rules requiring firms like payday lenders to determine if borrowers can repay loans. Should the CFPB’s rules become effective as slated in 2018, compliance costs will wipe out 70-plus percent of all businesses that extend short-term debt to consumers, industry advocates say.
In Austin, meanwhile, the leniency with which Texas oversees payday lending is facing a challenge via 39-and-counting cities that have adopted ordinances restricting some industry practices, such as by limiting loan amounts based on borrowers’ income. Roughly 8 percent of Texas consumers have used payday loans, compared to 5.5 percent nationally, according to the Pew Charitable Trusts.
In 2014, Texas was among four states where consumers paid the highest fees for payday loans in the country, according to Pew research. Like Idaho, South Dakota, and Wisconsin, Texas had no legal limit on payday fees—a state of affairs that, at least in the Lone Star State, remains true. “The Legislature could make a real difference for Texas families by putting the city ordinances into state law and adopting a fair rate cap for payday and auto title loans,” says Ann Baddour, director of the Fair Financial Services Project at Texas Appleseed, an Austin-based advocacy group.
Dallas, in 2011, became the first Texas city to adopt the so-called “unified ordinance,” which today is effective in nearby ’burbs like Flower Mound, Garland, Mesquite, and Arlington. Jerry Allen, a former Dallas city council member, remembers a payday lobbyist threatening to sue after Allen spearheaded the legislation’s passage. “I told him, ‘We’ll take your ass to the court of public opinion, and then we’ll take your ass to a court of law,’” he says.
Dallas County in 2015 had 432 “stores” that did payday lending, the third-most nationwide, according to Auburn University research. Tarrant County, with 329, ranked No. 4, with Harris County No. 1, and California’s Los Angeles County No. 2.
Texas’ light regulatory touch is a major reason that in 2015 the state had 23.1 percent of all payday-lending stores nationwide, says James Barth, a finance scholar who led the Auburn research. California, the No. 2 player, had 12 percent, he says. “Things remain somewhat uncertain at the moment about any legal or regulatory changes due to the election,” Barth said. Regulatory changes like the CFPB’s proposed rules would affect most other players in “alternative finance,” an umbrella term for roughly a half-dozen forms of pricey lending to the poor.
North Texas is a kingpin in alternative finance, home to players like Fort Worth’s FirstCash (perhaps the world’s largest operator of pawn shops,) Irving’s ACE Cash Express (payday lending and check cashing,) and Dallas’ MoneyGram (money transfer). FirstCash, ACE, and MoneyGram did not make executives available for interviews.
Taxis, Not Trains
Consumers use payday lenders as a convenient way to cover gaps in their finances, generally of $500 or less. In 2015, to get $100 for a two-week loan, Texas consumers on average would write a check for $123.53 to lenders, which cashed the checks on the individual’s next payday, according to Appleseed data. On average, the annualized percentage rates that Texas consumers effectively shell out on payday and auto title loans run between 200 percent and 500 percent, per Appleseed.
A 2007 article from Fordham Law School compared payday loans to taxis: economical for short-term needs, not the long haul. Borrowers typically encounter problems with “rollovers,” essentially borrowing again to re-pay existing debt. A Pew Charitable study in 2012 found payday borrowers take out an annual average of eight loans of $375 apiece and spend $520 on interest.
Roughly 69 percent of respondents in Pew’s study reported using payday loans for recurring expenses like utilities, credit card bills, or food. After crunching data from a state agency, Appleseed found the annual total of new payday loans in Texas fell 9 percent from 2012 through 2015 ($1.86 billion to $1.68 billion). But Texas consumers paid a total of 34 percent more in fees in 2015, from $1.24 billion to $1.67 billion, over that same time frame, Appleseed found. A big reason: Borrowers took out more installment loans, rather than re-paying debt in one payment.
“The data and findings of [Appleseed’s] report are questionable given the author,” says Dennis Shaul, CEO of the Community Financial Services Association of America, a trade group for short-term, small-dollar lenders. Shaul says CFPB data shows 55 percent of payday borrowers use the loans twice or less in a sequence. He also points to a Kennesaw State study that found borrowers with longer refinancing periods had better financial outcomes than those who took out loans for shorter periods.
What Rules Work Best?
For regulators, alternative financiers like payday lenders pose a thorny problem: What, if anything, should the government do? Suppliers of alternative finance cater to the roughly one in four adults that commercial banks largely can’t touch, or won’t.
North Texas is a kingping in aternative finance, home to players like fort Worth’s firstcash, irving’s ace Cash express and Dallas’ moneygram.
Consolidation of banks into fewer, bigger players also means smaller-dollar consumers don’t move the proverbial needle like the wealthy. “I worked as a check casher in California [for a research project],” says Lisa Servon, city planning professor at the University of Pennsylvania. “The boss told me, ‘The largest banks want one customer with a million dollars. Check cashers want a million customers with one dollar.”
But over-regulation could kill alternative finance—leaving consumers who need credit fast potentially seeking unregulated, dangerous choices. “Colorado has placed restrictions on payday lending rates, but the usury cap is high enough to allow lenders to make money by making adjustments,” said Jim Hawkins, associate professor of law at the University of Houston Law Center. “That’s the regulatory sweet spot.”
Coffee Tops Capital
For now, both for-profit and nonprofit markets lack large-scale alternatives to consumer credit like payday. That’s partly because alternative financiers may be less profitable than many believe. The 2007 Fordham study found that Starbucks had profit margins of 9 percent, compared to average margins of 7.63 percent for operations of then-seven public companies that did at least some payday lending. Firms that did pure payday lending—using only borrower’s bank accounts for collateral—had margins averaging only 3.57 percent. Margins doubled, on average, when pawnshop operators were factored in.
Unpaid loans consume a quarter of their interest revenue, the study found. Some 9 percent of checks bounce, and payday lenders collect on only half of bad checks.
In 2014, an alternative to payday lending surfaced as the Community Loan Center of Dallas was established, which makes payday loans at 18 percent interest and $20 administrative fees. A program of the nonprofit Business & Community Lenders of Texas, Community Loan works with employers to automatically deduct borrowers’ payments from their paychecks. “We fund our loans directly with capital raised for this purpose,” says Raquel Valdez, chief operating officer at BCL.
And a provision of the 2011 Dodd-Frank finance law provides incentives to get low- and moderate-income people participating in the financial system, such as through “micro-loans” of $2,500 or less. But Washington has yet to allocate funding for the so-called “Title XII” provision, and Republicans have Dodd-Frank in their rifle sites, experts say. “The broader the population that regulated lenders reach,” said William Stutts, Baker Botts senior counsel, “the less potent the unregulated alternatives are.”
Jeff Bounds is a freelance business writer in Garland.