Should Payday Lending be Outlawed in Texas?

Not all loans are created equal. Like if someone needs to borrow $100 to cover a bill before his next paycheck, he’s likely to pay about $20 back on that intial amount. Some states have labeled the practice usury, but in Texas, it’s just good, old-fashioned payday lending.

Wait a second. Payday loans aren’t part and parcel of the subprime mess we’re going through now, are they?

Well, not exactly. The subprime loans wreaking havoc on international markets involved lending money to people with poor credit so they could buy bigger homes than they could actually afford. Payday loans are a little different. They’re much smaller, often only a few hundred dollars for people who need emergency funds. But you’re still talking a subprime loan­—or more like sub-subprime.

With such tiny loans, how do you make any money?

By charging lots of interest. Most payday shops charge $15 in interest for every $100 loaned, due as soon as you get your next paycheck. That’s 390 percent APR. Your credit card APR, by contrast, might be 20 percent. Some payday lenders charge more. One of the bigger payday shops is Ace Cash Express, based right here in Irving. They charge a $20 fee for every $100 loaned. That’s 521 percent APR. The practice looks so much like usury that Georgia made it a felony in 2004. Canada has effectively banned it.

So I might not want my name associated with such a dubious business.

Why not? You’d be in good company. Mike Rawlings, aka Dallas’ “homeless czar,” was until recently a board member of Ace Cash Express. According to SEC filings, the former Pizza Hut president sold his Ace stock for $914,250 last October when the private equity firm JLL Partners bought Ace, a public company, for about $420 million. And Rawlings wasn’t the only prominent Dallasite on Ace’s board at the time of the sale. Matrice Ellis-Kirk, wife of former mayor Ron Kirk and a partner at the executive search and consulting firm Heidrick and Struggles, cashed out for $63,562. Political consultant Rob Allyn cashed out for $176,737. And Rusty Rose, who helped finance George W. Bush’s bid for the Texas Rangers, sold shares owned by his family for a total of $23.3 million.

Wow. So that means Rusty Rose and Rob Allyn are sleazebags?

No, that’s probably a bit strong. There are two ways to look at this business. Rawlings points out that payday lenders offer loans to people who couldn’t otherwise get them. And he has a point. Let’s say a struggling janitor with horrible credit needs to get a new car battery so he can drive to work—otherwise he’ll get fired and not be able to afford groceries for his kids. What bank would lend that man $100? Now, of course, the problem comes if he can’t pay back the $115 when he gets his next paycheck. The Center for Responsible Lending released a report last year saying the average borrower spends $793 to pay off one $325 loan and takes out multiple loans a year. That’s why 38 states regulate it. 

 Is Texas one of the states that regulates payday lending?

Nope, and that’s why it’s big business here, a $1 billion a year industry statewide. Three of the biggest players in the industry are based in North Texas: the aforementioned Ace, Fort Worth’s publicly traded Cash America International, and First Cash Financial Services of Arlington, also public.  The profit margins of all three are healthy but not outlandish. According to SEC filings, their margins last year were between eight and 11 percent on revenues from $269 million on the low end (First Cash) to $693 million on the high (Cash America). Of Ace’s total revenue in 2006, $108 million, or 35 percent, came from fees and interest on its payday loans. Of Ace’s $39 million in loans unpaid at the time of filing, $9 million, or 24 percent, came from loans at least 90 days old. 2006 was a better year than 2005 for Cash America. Fees from payday loans accounted for 68 percent of the increase of the company’s revenue, due to “the higher average balances owed by customers,” according to Cash America’s annual report. In other words, more and more, our struggling janitor is working himself into a hole.

Any chance for reform in Texas?

Curiously enough, even industry types are pushing for regulation. Jabo Covert of the Tennessee-based payday lender Check Into Cash worked with state Senator John Carona (R-Dallas) to introduce a regulatory bill this past session in the Lege. Covert, like many lenders, says Check Into Cash will only operate in states where regulation is in place. The industry’s trade group, Community Financial Services of America, holds a similar position. “A lot of the opposition to us is based on horrific stories of consumers getting into trouble,” says Steven Schlein, CFSA’s spokesman. “Make every company adhere to the best practices, and you end the horror stories.” This is why Carona drafted his bill. The unregulated market was limiting the opportunity for more business in Texas. His bill would have capped the amount of interest to $15 for every $100 loaned. It would have forbidden any loan to exceed 25 percent of a borrower’s gross monthly income. And if a borrower were unable to pay back the loan and interest in full, the bill mandated a four-payment installment plan without any additional fees or interest.

Let me guess. The Lege did nothing.

You got it. Carona’s bill died the same death all payday bills have died over the past four sessions. A Carona staffer says, “Certain folks within the industry didn’t like the bill.” Don Baylor Jr. of the Center for Public Policy Priorities, a Texas nonprofit advocacy and research organization, agrees. “The industry was split to a large degree because you have these folks who are operating in Texas and it’s never been so good: we’re able to charge whatever the market will bear. And then you have a few companies that are attempting to enter the market. But they’ll only go in if there’s a law.” And the last thing a legislator wants is to get in the middle of an industry battle.

Why’s that?

Well, if you believe state Senator Elliot Shapleigh (D-El Paso), it’s because legislators need campaign funds. “In Texas, the connection between wealth and politics is immediate,” he says. “The lobbyists descend on the chair [of a committee] and kill a bill.” Cash America, for example, has paid $88,000 over the years to enlist the lobbying efforts of one Jack Abramoff.

Good ol’ Jack Abramoff. That tells me everything I need to know.

Right. Like I said, you can make a killing. Payday lending is good work, if you can get it.

Write to [email protected].

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