Last month, the financial services committee of the Texas House unanimously approved a trio of bills aimed at reducing abuses by payday lenders that, in some cases, can leave borrowers in seemingly unending cycles of debt.
The legislation creates a new set of rules for payday lenders and places them under the regulation of the state's finance commission and Office of the Consumer Credit Commissioner.
The package is designed to prevent the seemingly infinite cycle of debt that can occur when a borrower is unable to pay the principal at the agreed-upon date. Under the new terms, lenders would be required to accept partial payment of the principal, limit the number of renewals a borrower can make and offer a pay-down plan that gives borrowers a path to escape from their debt.
According to Texas Appleseed, which supports the proposed regulations, the APR of payday loans can exceed 500 percent, far exceeding the rules permitted by state lending laws. Since 2005, the payday lenders have used a loophole in Texas law in which they claim to operate as "credit service organizations" -- as opposed to actual lenders -- to escape oversight.
Borrowers must pay the loans in full within two to four weeks -- which can be challenging -- and partial payments often aren't permitted. Until that full payment is made, borrowers are charged penalty fees that amount to 20 to 30 percent of the loan every two weeks, which in some cases can make it nearly impossible to ever put together enough money to pay the principal.
The reform bills would require lenders to provide more transparent information about their rates so borrowers would know exactly how much they're paying to borrow and how long it could take to pay off their debts.
The plan would also protect consumers by limiting the amount they can borrow based on their ability to repay. Cash advances would be capped at 25 percent of a borrower's gross monthly family income if the income is below the federal poverty level. The cap would be 32 percent for borrowers whose income is higher.
As the country continues to suffer the effects of an economic downturn, Texas isn't alone in pursuing heightened regulations of an industry that caters to Americans in the worst financial shape. Thirty-one state legislatures have considered payday lender bills this year, according to data provided by the National Conference of State Legislatures.
But in Texas, the process has been affected by the fact that Republicans -- who historically have resisted regulation -- make up the overwhelming number of legislators. Advocates for payday lending reform had to craft the legislation with those politics in mind and assembled an unusual group of supporters around their proposal: faith-based organizations, liberal advocacy groups, charities, and a bipartisan group of lawmakers.
Republican State Rep. Vicki Truitt, who chairs the financial services committee and sponsored the bills, is keenly aware of the pitfalls of short-term loans. But as a self-described "free market person," she didn't want to regulate the industry out of existence, especially because the alternatives for borrowers short on cash could be even more unseemly.
With that in mind, Truitt tells Governing, she immediately took a potential cap on interest rates and fees off the table. From there, she assembled a group of three consumer advocates and three industry representatives to work to craft a bill.
While the industry initially resisted the effort, Truitt suggested the businesses would be wise to lend their support. "I told them if there was a legislature during which they'd want to be regulated, this is it, when we have 101 of 150 Republican legislators in the House," Truitt says.
To guide the discussions between the two sides, Truitt enlisted professional mediators from the University of Texas School of Law -- a highly unusual move. "There was a great deal of angst and distrust between the parties," Truitt says. "They didn't even trust me. I told them I felt they needed professional help."
Despite some lingering differences of opinions, Truitt believes the two sides agreed on the majority of the package.
Truitt has also undertaken some strategic maneuvering to help improve the odds the reforms will become law. Instead of putting them into a single bill she placed them in three narrowly-tailored bills. A common legislative trick for a bill's opponents is to work to amend it to the point that it's no longer viable. That's happened to payday reform legislation in the past. This time, Truitt thinks three bills have a better chance of survival than one.
Don Baylor, a senior policy analyst for the Center for Public Policy Priorities, believes the bills could offer stronger consumer protections. But he says it was important for consumer advocates to be mindful of the political realities of the legislature. His group has endorsed Truitt's bills.
"There's too much abuse going on right now to really continue the status quo," Baylor tells Governing. Though the existing bill may not be the strongest one possible, it's a vast improvement over the current state of affairs, Baylor says. (Some critics of the plan, most notably Catholic organizations, have not endorsed the plan, arguing that the reforms don't go far enough.)
One of the most crucial aspects of the bill will be the mechanism it creates to track and analyze payday lending. That information could help lawmakers get a better picture of how Texans use payday loans and may ultimately lead to more protections in the future, Baylor hopes.
Despite bi-partisan support, Truitt's legislation isn't a sure thing.
Though the bills may represent the best chance the state has had in a decade at reforming the industry, they're running out of time. "I've got some strategic decisions to make," Truitt says. "If it's not on the calendar by early to mid next week, I think they're dead."
