Last week, the Senate passed SB 1247, the Payday Lending Reform Bill, with strong bipartisan support. It was considered tougher than expected, in large part due to amendments passed by State Sen. Wendy Davis.
The bill would allow cities to establish payday lending ordinances, impose limits on fees and interest rates, allow civil penalties against payday lenders who try to offer consumers unauthorized products, limit multiple-payment payday loans and auto title loans from extending beyond 180 days or being refinanced, limit the number of credit extensions permitted and impose a “cooling off” period between loans.
Right now, Texas is a pretty good place to be if you're a payday lender. Not so much if you're a consumer. According to the Dallas Morning News: “The Pew Charitable Trusts classified the Lone Star State as one of 28 permissive states when it comes to payday loan regulations. Pew found that 8 percent of Texas residents use payday loans, above the national average of 5.5 percent.”
The payday lending bill now has to make it through the House, where the payday lending industry is expected to ramp up its efforts to change the bill from what was passed in the Senate. Sen. Davis doesn't feel too optimistic about its chances there: “They're going over to the House and try to kill it… There are 3,500 payday and auto title storefronts in Texas, more than the number of Whataburgers and McDonalds combined.”
But it does have the support of both parties, as well as many consumer advocates. According to the Center on Public Policy Priorities (CPPP): “Texas Impact, CPPP, and other consumer groups supported the committee version of the Senate bill. Among other consumer protections, the committee version would save Texas consumers at least $132 million annually by prohibiting excessive fees.”
The Consumer Financial Protection Bureau also released a white paper last week, which found problems with habitual use of payday loans:
“These products may become harmful for consumers when they are used to make up for chronic cash flow shortages. We find that a sizable share of payday loan and deposit advance users conduct transactions on a long-term basis, suggesting that they are unable to fully repay the loan and pay other expenses without taking out a new loan shortly thereafter. Two-thirds of payday borrowers in our sample had 7 or more loans in a year. Most of the transactions conducted by consumers with 7 or more loans were taken within 14 days of a previous loan being paid back-frequently, the same day as a previous loan was repaid… It is unclear whether consumers understand the costs, benefits, and risks of using these products.”
The New York Times reported that federal regulators will soon be cracking down on payday loans as well by focusing on the big bank competitors to payday lenders, like Wells Fargo and U.S. Bank, which offer short-term, high-cost loans tied to checking accounts. Soon, banks will have to assess a consumer's ability to repay the loan before issuing it, and to impose a mandatory 30 day “cooling off” period between loans to prevent consumers from taking out even more loans to cover debt on previous loans.