By Debbie Stevenson
Killeen Daily Herald
A bill headed to the floor of the Legislature this week could make it even easier for the payday loan industry to operate in Texas.
Texas House Bill 846, if passed, essentially would allow lenders to legally charge high interest rates that could mean a borrower could end up paying more in interest on the loan than on the principal.
Introduced by Rep. Dan Flynn, R-Van, the bill passed its first hurdle Monday with a 5-1 vote by the House Financial Industries Committee. It is expected to go to the House floor sometime this week, where easy passage is anticipated.
Currently, payday loans in Texas are regulated under rules adopted in 2000 by the Texas Finance Commission. Lenders can loan up to $500 and hold borrowers personal checks to make sure the loans are repaid or refinanced. Lenders also can charge a fee of $10 per loan plus 48 percent annual interest for payday loans.
Payday loans usually are small cash advances based on a personal check held for future deposit. They can be obtained through stand-alone companies, check-cashing outlets, pawn shops and through online or telephone loan service providers. The loans are short-term and generally only require a drivers license and disclosure of income from a job or government benefits to get them.
Industry representatives maintain the proposed law in Texas would allow the state to regulate how they operate and actually decrease the cost to borrowers for notes financed out of state, the main source for payday loans. Those loans typically charge from $17 to $18 per $100.
Under Flynns bill, payday lenders would be limited to $15 per $100 borrowed. With most loans lasting only two weeks, that would equal an annual interest rate of 391 percent. Current law caps it at 114 percent.
State Rep. Dianne White-Delisi, R-Temple, was unavailable for comment Friday. However, state Rep. Suzanna Gratia-Hupp, R-Lampasas, said she would back the bill in its current form.
Its got some pretty good protections in it for military, Hupp said, noting that a lender cannot attempt to collect if the borrower is on a military deployment or garnish wages if the soldier runs into trouble with the loan.
The lender must accept any repayment agreement negotiated by a military or third-party counselor, she said.
Hupp said annual percentage rates cited by the bills opponents really do not apply to payday loans.
These are intended to be short-term loans. I think thats a vitally important point that needs to be made, she said. This bill actually reduces the charges for what they are intended to be, which is actually short-term loans.
The fact is that this loan is not intended for long term, Hupp added. They have to do a notice to the consumer in 12-point type, which is pretty gosh darn big.
Other consumer protections built into Flynns bill include a next-business day cooling off period in which the borrowers can change their minds without penalty and employers cannot be contacted in the case of default. Returned check charges are limited to 10 percent of the loan, but capped at $20, Hupp said.
Plus, a consumer has to confirm there are no other outstanding loans and cannot be threatened with prosecution, she said. Lenders also would be required to furnish repayment plans if a loan is renewed.
Its got a lot of protections in it that we dont currently have, Hupp said. In the long run, I think consumers are going to benefit from more competition in the marketplace. This bill puts Texas-based banks and businesses on equal competitive footing with out-of-state banks.
A similar measure passed unanimously March 30 by the state Senate Veteran Affairs and Military Installations Committee also restricts how payday lenders do business with military personnel and their families.
In the Texas Senate, Bill 1479, introduced by state Sen. Eliot Shapleigh, also would prevent payday lenders from taking actions that harm military personnel and their families, including garnishing wages, contacting commanders.
Lawrence Meyers, owner of Texas-based First Cash Financial Services, said he studied the bill to see how it would affect his business, which operates under the bank model now required under state law.
My first thought before running any numbers was whether there might be anything in Texas law that will either blunt the FDIC guidelines or make them irrelevant. The answer: Yes, he stated in a March column on the Motley Fool financial information service Web site.
State rules, he added, are far less restrictive than the bank model, in which FDIC-chartered banks provide the payday lenders with money to fund their loans.
House Bill 846, Meyers said, would change the current law requiring payday lenders to use the bank model and instead subject them to the less restrictive state law. If that happens, it would mean that the FDIC guidelines wont apply to First Cashs business in Texas.
Nationally, payday loans, which the Center for Responsible Lending estimates costs American consumers $3.4 billion per year in excess fees, have come under increasing scrutiny by Congress. The Defense Department also began addressing the issue after its studies showed the military to be a prime target for the industry.
Military communities are favorites for payday lenders, Holly Petraeus told Rotarians with the Killeen-Heights Rotary Club on Friday, because soldiers have steady government incomes and cannot quit their jobs.
Petraeus, who is heading BBB Army Line, a group that monitors business practices around military installations, said the primary customers for the industry are junior-grade troops.
However, the Community Financial Services Association, which represents about 15,000 payday loan stores nationwide, cited a 2001 survey that shows only about 2 percent of customers are active-duty military.
Fort Hood financial readiness branch officials said they are aware the practice is a hot-button issue, but were having trouble tracking it because soldiers are reluctant to admit they are using the services.
Officials at other installations told The Associated Press recently that they are seeing problems with soldiers sinking deep into payday debt.
Yes, they are targeting the post primarily because of the assurance theyll be paid, said Richard Bridges, spokesman for Fort Carson near Colorado Springs, Colo.
At Fort Bliss, officials at the Army Emergency Relief office told the AP that nearly a tenth of the 10,000 active-duty troops stationed there have needed financial counseling because of payday loans and other debt ranging from high interest rent-to-own plans to bounced checks.
On April 19, the Pentagon introduced proposed regulations aimed at preventing marketing practices that have exposed military personnel, especially recruits and junior officers, to high-pressure or deceptive sales pitches for insurance and other financial products.
The proposed rules are the militarys first official response to concerns raised in Congress last fall after reports in The New York Times documented abusive sales practices and unsuitable financial products on several military installations.
Federal banking regulators also have barred banks from renting their charters for payday lending and banks insured by the Federal Deposit Insurance Corporation could eventually find themselves blocked from offering payday loans.
In addition, Congress is considering legislation, introduced with bipartisan support, to address problems raised in the article, the Times reported.
Critics contend the Texas bill compromises recent protection moves at the federal level and by the Defense Department, claiming the industrys powerful lobbying interests are urging legislators to legalize their loan practices in the state before the federal loophole that allows them to partner with out-of-state banks not subject to current state law is closed.
Luke Metzger of the Texas Public Interest Research Group told the Austin American Statesman for its Friday edition that Flynns bill still lets companies charge rates that would make a loan shark blush.
The Defense Department has scheduled a meeting May 6 on its proposed rules at the Central Library in Arlington, Va.
Public comments must be received by June 20, and can be sent to Col. Michael A. Pachuta or James M. Ellis in the Office of the Under Secretary of Defense for Personnel and Readiness, 241 S. 18th St., Crystal Square No. 4, Suite 302, Arlington, VA., 22202, or via e-mail to Michael.Pachuta@osd.mil or James.Ellis@osd.mil.
Contact Debbie Stevenson at firstname.lastname@example.org