Study: Payday lenders continue to ignore state laws related to fees and protections (July 2003).

Consumers Union urges Texas regulator to take action, FDIC to close loopholes, consumers to "avoid payday lenders at all costs"

Payday lenders are skirting Texas rules that cap fees charged for small, check-secured loans and protections that require loan balances to decline upon renewal, according to a Consumers Union survey of 31 payday lenders released today.

The survey's release comes as federal regulators take steps to crack down on partnerships between banks with unregulated fees and check cashers and other storefront lenders. The Federal Reserve has taken recent action to curb the practice and Consumers Union is urging the Federal Deposit Insurance Corp. (FDIC) to do the same.

Earlier this year, Consumers Union helped defeat in Texas a payday loan industry proposal that would have aggravated an already tough situation for borrowers. The proposed law would have licensed payday lenders and authorized them to charge rates of more than 900 percent APR. Similar legislation authorizing payday lenders to charge higher rates has been introduced around the U.S. and adopted in some states, most recently in Oklahoma.

Failing to meet caps

According to the CU survey, none of the 31 lenders in Austin, Dallas, Lubbock, Fort Worth, Houston and San Antonio came close to meeting the current fee caps set out in Texas regulations. The survey was based on a typical loan of $200 to be repaid over 14 days. Lenders charged from $35 to $68 for this loan, equivalent of 450 to 880 percent APR. Under Texas law, the maximum charge allowed for such a loan would be $13.73, equivalent to 178 percent APR.

Lenders also ran afoul in many instances of Texas law by permitting unlimited renewals of the loan as long as a renewal fee was paid. Under state law, loan renewals are allowed after the first renewal if the loan balance declines with each payment. Of all the companies surveyed, only one did not allow renewals and two others mentioned requiring a declining balance as a condition for a loan renewal on the fifth renewal.

According to a recent Iowa study, consumers typically roll over a payday loan 12 times before paying it off. In essence, many families that live from paycheck-to-paycheck end up paying hundreds of dollars they can't afford in fees to keep these loans afloat. Not paying them would mean their checks would bounce and their financial situation might be even worse.

Other problems were uncovered.

• The "working poor" — including the Social Security dependent elderly — are targeted by some lenders despite their limited ability to meet loan terms and propensity to end up trapped into an endless cycle of debt.

• Only four of the 31 lenders surveyed were found to be licensed by the Office of Consumers Credit Commissioner (OCCC), although every payday lender is required to be licensed by statute.

• Some lenders continue to disguise themselves as operating in some other business. For example, two lenders surveyed offered "internet service" in return for a "cash rebate" as a new subterfuge (although the out-of-state branch of one of them offered CU surveyors a straight payday loan when they called, but pitched their "internet service" for a fee in their Dallas office).

Said the report: "Payday lenders argue that their excessive rates are necessary because they don't conduct credit checks, but these income verifications, combined with electronic funds transfer agreements, ensure the borrower has a steady cash flow available directly to the payday lender--in essence, a credit check."

The feds get tough

Most federal regulators have cracked down on partnerships between banks and payday lenders. The primary bank regulator -- the Office of the Comptroller of the Currency (OCC), and thrift regulator -- the Office of Thrift Supervision (OTS), both have strongly discouraged these arrangements.

The Federal Bank of Philadelphia recently asked the First Bank of Delaware to voluntarily cease its partnership with payday lenders in other states. The bank announced on June 27 that it would exit the business effective Oct. 31.

Meanwhile, the FDIC has promised to release guidelines that will "raise the bar for banks involved in this business significantly."

"Until the FDIC follows the lead of the OCC and the OTS, it seems likely that other payday lenders will follow companies like Cash America and seek to 'rent' the charters of state banks," said Rob Schneider, senior staff attorney for CU's Southwest Regional Office.

Also, Consumers Union has asked the Texas Consumer Credit Commissioner to investigate and take appropriate action against companies that are attempting to avoid Texas usury law by attempting to disguise payday loans.

In the meantime, Consumers Union advises consumers to "avoid payday lenders at all costs" and seek alternatives. Among these:

• take small loans from credit unions, if available, or take a cash advance on a credit card

• make a pawn loan using an unessential item as collateral

• seek out a signature loan - a small unsecured loan, the loans are expensive, but far less so than payday loans and are generally widely available even to those with poor credit.