The Debt Trap: Payday loans on the rise in Texas

This loan store is one of many on South Cooper Street in Arlington.
This loan store is one of many on South Cooper Street in Arlington. Star-Telegram

Editor’s note: One study shows that the average Texan is about $40,000 in debt. Nationwide in 2013, 2.5 million people included payday lenders among their creditors. The Debt Trap is a collaborative project by the Star-Telegram, WFAA and the Austin American-Statesman aimed at shining a light on what looks like easy money, loans that either help the economically disadvantaged or devastate them, depending on whom you ask. This installment explores payday loans. Upcoming installments will cover car-title loans, reverse mortgages and student loans.

The Rev. Wendel “Buck” Cass, a retired Tarrant County employee, normally keeps to a tight budget. But he was short on cash when his car broke down a few years ago, so he took out a $500 payday loan from a lender on McCart Avenue in Fort Worth.

Cass, 69, expected to pay an extra $50 to $125 to secure the loan. But after three months, when he could afford to pay it off, he owed more than $300 in interest. When all was said and done, he had paid more than $810 to borrow $500.

“I’ll go broke if I ever do that again,” said Cass, a resident minister at Morning Chapel CME in Fort Worth. “What a rip-off.”

Supporters of payday loans, a growing business across the state, say they are a lifeline for people desperate for cash. Critics say that the lenders prey on the poor and that Texas laws do little to protect consumers.

“People have been doing payday loans in Texas for a long time,” said Rob Norcross, spokesman for the Consumer Service Alliance, Texas’ payday trade group of 3,000 lenders. “It’s just gotten more popular in the last decade.”

Tarrant County, in particular, is a hot spot. Clusters of stores line streets from Fort Worth to south Arlington to Haltom City. On East Lancaster Avenue, 11 storefronts conduct business. South Arlington had more than 55 locations in a 5-mile stretch between Interstate 20 and Interstate 30, 2012-13 records show. See interactive map

“The payday-lender market has risen because of the demand of people for it,” Fort Worth Mayor Betsy Price said. “Businesses tend to pop up around demand.”

Norcross agreed that the marketplace is working well.

Along with the number of businesses, the fees that Texans pay to secure payday loans similar to the one Cass obtained have been on the rise in recent years, state records indicate.

Critics, including anti-poverty and church groups such as the Wesley Mission Center in Mansfield, say the loans create a debt trap.

“I advise anybody: If you don’t need it, don’t do it, don’t do it, don’t do it,” said Thomas Richards of Dallas, who borrowed $300 from a payday lender and paid back more than $600. “It’s a trap.”

The Rev. Terry White, pastor of Marsalis Avenue Missionary Baptist Church in Dallas, said dozens in his congregation have been caught in the trap. Some have to refinance the loans repeatedly because they can’t pay up in 14 days. The results can be disastrous, White said.

“After four weeks, you might be paying $180 interest on a $200 loan,” he said. “I didn’t realize the exorbitant rate of interest that was being charged and compounded.”

John Siburt, president and chief operations officer of CitySquare, an anti-poverty group in Dallas, said the business model is exploitative.

“It does seem unethical and immoral to make millions of dollars on the backs of poor people,” he said.

High interest rates

Texas borrowers who pay up in 14 days are charged an interest rate of about 22 percent. So the typical borrower of a single-payment payday loan of $500 will pay an extra $110 in interest.

But after 90 days, the borrower is on the hook for $1,270, thanks to compound interest. The rate climbs to 154 percent and the interest stacks up quickly.

The financing charges are complex because lenders offer different types of loans. What’s more, the state does not enforce a rate cap. Nor does it tell payday lenders how much they can charge or how to structure the loans. The result: Virtually any rate or charge can be applied to a loan that is renewed.

Opposing camps disagree on the percentage of borrowers who fall into the debt trap.

Norcross says only 10 percent of borrowers become ensnared.

“Ninety-percent of people are paying their loans back” when they are due, he said.

But payday-lending critics say more borrowers are like Wanda Riley of Richardson. Last year, she ended up owing $1,229 on seven active loans. They initially ranged from $121 to $246, according to an adviser at a charity that helped Riley get out of debt.

“You get one loan, and then you got to go get another because you can’t pay back the first one, and then you get another loan to try to pay that one,” Riley said.

Information from the state Office of Consumer Credit Commissioner, which acknowledges that it sometimes has to correct errors in data reported by the lenders, leans in favor of critics.

The data show that more than half of borrowers refinance more than once. In the Fort Worth-Arlington area, 55.24 percent of consumers refinanced their single-payment payday loans, according to second-quarter data for 2014.

A federal report echoes that. A 2014 study by the Consumer Financial Protection Bureau found that 4 in 5 payday loans is rolled over or renewed within 14 days.

‘Abused by this system’

Kathleen Hicks of Fort Worth fought and lost the political battle of her career over payday loans while she was a member of the City Council.

She went on a seven-year crusade to stop payday lenders from proliferating in her southeast district, where she says the poor and working class struggle to access credit.

“People are being abused by this system,” Hicks said.

Council opponents, including Councilman Frank Moss, teamed up with payday-loan lobbyist Tonya Veasey, the wife of now-U.S. Rep. Marc Veasey, D-Fort Worth, to pressure the city to loosen zoning restrictions on payday lenders, according to email correspondence between Tonya Veasey and council members in November 2009.

Councilman Sal Espino, who served when Hicks waged her war on the industry, said he favors crafting an ordinance similar to those adopted in Dallas and other cities to limit payday-loan storefronts at major intersections and in certain neighborhoods. The ordinances also cap loan amounts based on borrowers’ incomes and penalize lenders who violate state laws.

“My view is that if we were to pass an ordinance now, we would continue to exert pressure on the Legislature to do something to protect consumers,” Espino said.

In the Fort Worth-Arlington area, only Saginaw, Watauga and Flower Mound restrict payday lenders, according to the Texas Municipal League, which tracks cities that have approved restrictions. See the full statewide list here.

It remains to be seen whether the Legislature will move on the issue during this session.

Last session, a bill by then-Sen. John Carona, R-Dallas, that proposed statewide limits on payday lending failed in the House.

This session, Sen. Royce West, D-Dallas, and Rep. Helen Giddings, D-DeSoto, said they have not given up on passing a measure to overhaul payday lending and auto-title loans.

Giddings said she supports West’s Senate Bill 121, intended to protect Texans from high-interest loans that can balloon on borrowers.

“People find themselves stuck,” Giddings said.

The measure is designed to set terms for extended payment plans, add rate caps, and prohibit debt collectors from using threats and coercion.

No changes in sight

Fort Worth is not likely to take up the issue again.

Price said she’s not interested.

“Who am I to say that if you are desperate, you shouldn’t be able to get that loan?” she said.

The industry has sued cities that have adopted restrictions, but the challenges have largely failed.

Employees at Fort Worth storefronts declined to comment. Repeated efforts to reach Jay B. Shipowitz, CEO of Ace Cash Express, a payday lender in Irving, were unsuccessful.

Some lenders, including one of the nation’s largest, Cash America, whose headquarters is in Fort Worth, have closed most stores in cities that adopted the ordinances, Norcross said.

A Fort Worth spokeswoman for Cash America, a $1.8 billion publicly traded company, said it has shut down most of its payday-loan business in Texas so it can focus on its pawnshop business.

In November 2013, Cash America reached a $19 million settlement with the Consumer Financial Protection Bureau after accusations of abusive practices, such as gouging members of the military and “robo-signing,” a practice that is used to sue customers for past-due debts.

Norcross said that Price’s position — that the city should stay out of it and leave it to the state to legislate — could work and that the industry could look at a compromise.

One “middle ground,” he said, would be to give people more time to repay. For example, lenders would allow borrowers to pay back $400 over six weeks instead of four, he said.

“It would give people a better opportunity to be successful in paying their loans back,” he said.

‘The payday loan is out’

Tonya Veasey took a similar stance in her 2009 email to council members.

“These businesses are the only safe and reliable locations for financial services” for underserved communities, her email said.

Tonya Veasey and Moss did not return calls seeking comment.

Hicks said Fort Worth has let residents down by declining to restrict payday lenders.

“I wish people could have just had more courage,” she said.

Richards, 56 — the Dallas borrower — said he learned a valuable lesson. He borrowed the $300 after his Social Security check was delayed by two months and he couldn’t pay his rent or buy food. He said his payout was more than $600.

So these days, he sets aside $25 each month and puts it on a debit card.

“If I need anything, I got it there,” Richards said. “The payday loan is out. I ain’t dancing to that song no more.”

Tim Eaton, a staff writer at the Austin American-Statesman, contributed to this report.

Yamil Berard, 817-390-7705

Twitter: @yberard