Rob Schneider of Consumers Union with the press.

Payday loan apologists disregard the facts (Aug. 2002).
By Rob Schneider

To say the practice of payday lending helps low-income people may be akin to arguing the accounting practices at Enron and WorldComm were beneficial to company employees and shareholders. It defies credulity.

Payday loans are notorious for gouging consumers. These short-term, high cost loans use a borrower's personal check for collateral. They carry interest rates of several hundred percent. Payday lenders charge up to $33 per $100 borrowed every 14 days, and borrowers who cannot repay often renew this "advance," repaying the lender in fees far more than the amount borrowed.

There's a good reason why Texas has had limits on interest rates and consumer protections for borrowers since its days as a republic. Notwithstanding, "loan sharking" and other abusive practices remain alive and well today as lenders use loopholes in the law to raise their interest charges far above the Texas caps and avoid protections.

This evasion of Texas' rate caps and consumer protections remains both difficult for regulators to stop and attractive for lenders to pursue. So attractive that these businesses often team up with national banks in order to avoid complying with state consumer protection laws.

Earlier this year, for example, the Office of the Comptroller of the Currency (OCC) ordered Eagle National Bank to cease all payday-lending activities, including several payday loan operations in Texas. Eagle had partnered with Dollar Financial Group to offer payday loans around the country, and its payday lending volume had risen from $3 million in 1995 to around $400 million in 2001.

Often payday lenders escape state usury laws altogether by using disguised variations of the practice and insisting they are not loans. A popular version of payday lending, termed "sale leaseback" until recently attempted to avoid Texas consumer protection laws by disguising the loan as a lease of the borrower's personal property. That loophole was closed by the Texas Legislature last year.

The problem with payday loans is that the lender has you hook, line and sinker. If you are unable to come up with all the money owed at the end of the two-week term, the lender can cash - or threaten to cash - your check. Every borrower knows that if the check bounces, it may mean the rent or car payment check also bounces. Too many bounced checks can mean you forfeit your checking account altogether, and it may make it impossible for you to open another.

In case after case, desperate borrowers who cannot fully repay loans in 14 days renew them again and again. Unscrupulous lenders try to frame the loans as one-time, short-term fixes that are cheaper than bouncing checks. The reality is that often people who make loans get in a cycle of renewing them where they may pay far more in interest than the amount borrowed.

Are there alternatives to payday loans? You bet.

Texas law allows small loans under $500 to be made at high rates, but much more cheaply than payday loans and with far better consumer protections. In fact, in 2000, more than 4.7 million such loans were made for more than $1.3 billion. In contrast to payday loans, these are paid off in installments, so that each payment reduces the principle. Also, although the interest rates are high - often exceeding 90 percent, they are dwarfed by the rates charged for payday loans.

Texas regulations even allow check-secured payday loans. Though the rates can top several hundred percent, they have built-in protections that require the loans to pay down principle. Texas laws do not prevent payday loans, they allow them, but with limits that put abusive practices out-of-bounds. But some lenders avoid even these protections.

Another option is credit unions, nonprofit financial institutions owned by their members, and a good source for inexpensive small loans or overdraft protection.

People who are financially desperate often are willing to pay unconscionable interest rates under abusive terms. Payday lenders know this and capitalize on it. For more than 150 years, Texas laws have protected these desperate people from those who would take advantage, and we should not allow lenders to avoid Texas law by using out-of-state banks.

Consumers Union supports efforts in Congress and in the Texas Legislature to curb lending abuses by lenders that prey on people they already have over a barrel. It is important that everyday Texans remember our history and the reasons we protect the needy from the greedy.

(This op ed was published by the Houston Chronicle on August 5, 2002.)