A Texas Senate committee will hear a bill today filed by Sen. Wendy Davis that would limit how much payday lenders can charge to make loans and put them under the same oversight as banks and credit unions.
The bill would affect payday, auto title and other consumer lending firms that operate under laws governing so-called credit service organizations. They arrange short-term loans at combined interest and fees that Davis said often exceed an annual percentage rate of 500 percent. The bill would bring the firms under the section of the Texas Finance Code that applies to other lenders.
The bill would also bar fees for arranging or guaranteeing third-party loans, and it would prohibit credit service organizations from obtaining consumer loan extensions for customers.
"They're making incredible profits for a very vulnerable group of borrowers who feel like they have no other alternative," Davis said Monday. "The very least we can do is to make this a fair alternative."
Rob Norcross, spokesman for the Consumer Service Alliance of Texas, said firms that specialize in small short-term loans can't afford to operate under the rate structure called for in Davis' bill.
"It basically eliminates the credit service organization business, which would eliminate short-term loans in Texas," Norcross said in an interview. The alliance represents firms that have about 7,800 employees in Texas, he said.
"We probably represent 75 to 80 percent of the stores in Texas," Norcross said. "If you extrapolate out, there's 10,000 jobs that would be eliminated if this bill passes in the form it's in."
The Senate Business and Commerce Committee will take up the bill today, and Davis is claiming a broad coalition. Scheduled witnesses in favor of the bill include representatives from AARP and the Christian Life Coalition, expected to testify on the impact on groups such as the elderly, Davis' office said. Former Speaker Tom Craddick is carrying the bill in the Texas House.
No vote will occur today, Davis said. Her group has asked the state's consumer credit commissioner for an opinion on whether the rate structure in the Texas Finance Code is fair.
Davis' summary of the bill cites state estimates that Texas had 3,374 registered credit service organization locations as of October. The firms arrange loan extensions through third-party lenders, which provide loans at up to 10 percent annual interest, Texas' limit for unlicensed lenders.
The credit service organizations charge a fee of $20 to $30 for each $100 borrowed, and customers must pay these fees for each loan period, usually two weeks to a month, until the loan is repaid, Davis' summary said. Partial repayment isn't allowed, so a customer who can't repay must re-up with more fees or risk hurting his or her credit, Davis said.
A typical $300 loan can easily turn into an $800 debt within three months, Davis said.
The Texas Finance Code lays out a structure that would allow up to 135 percent annualized interest on a two-week loan, which Davis views as generous.
But Norcross said conservative industry data show that a lender's costs on a $100 two-week loan are about $13.70, compared with the $11 the lender would be allowed under the Texas Finance Code.
"You could charge $16 for a $300 loan," but publicly traded finance companies say their costs for such a loan would be $42, Norcross said. "You can't operate profitably charging $16 for it if your costs are $42," he said.
Larger lenders could afford to venture into that territory, "but only if it's not your main line of business," he said.
Davis said the lack of regulatory power means that no Texas entity can look into the industry's data and claims. Such an entity should be able to collect data on numbers of loans, loans rolled into new ones and fees charged, she said.
"No one has the authority to ask," said Davis, who also filed a bill that gives the state authority to enforce a 2007 federal law that caps interest rates charged to military service members and their dependents at 36 percent. Davis' bill extends the same protections to Texas National Guard members and dependents.
Scott Nishimura, 817-390-7808