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AUSTIN, TX - Consumers Union and the Consumer Federation of
America are asking the Texas Finance Commission to modify proposed
rules that would authorize payday loans in Texas, saying the "rules
fall short of addressing the primary areas of concern - high costs,
the coercive nature of the loans, and renewals."
The rules will be considered for final adoption by the Commission
on April 28. Comments by interested parties were due on March 31.
CU and CFA are urging the minimum term for the loan be expanded
from the proposed seven days to 14 days, saying the shorter term will
encourage renewals and multiple loans, creating effective interest
rates at "unconscionable levels." A seven-day term would result in an
effective interest rate of more than 500 percent on a $100 loan.
"Increasing the minimum term to 14 days results in a much more
reasonable effective interest rate that does not grossly exceed rates
charged for other short-term loans," the groups said in prepared
comments submitted to the Commission.
Another major concern is that a seven-day term falls outside the
pay cycle of most workers. "Since a large number of borrowers are not
paid on a weekly basis, a lender choosing to set a term shorter that
the borrower's next paycheck will create a hardship for borrowers,"
the statement said.
"A repayment cycle shorter than the borrower's pay cycle will
necessarily force the borrower to renew or take out s separate loan
from another lender to repay the original loan. This will require a
borrower to incur new costs, making it more difficult to finally
repay the loan."
CU and CFA also urged the Finance Commission to change its
proposal that payday loans convert to a declining installment note
after one consecutive renewal to make them convert to a declining
balance installment note when the loan is renewed for the first time.
A declining balance means that the total amount due must start
declining with each loan renewal, rather than getting larger.
Loan renewals can quickly get out of control. The average user
takes out 10-12 loans per year, according to industry analysts. "It
is essential that the proposed rules do everything possible to limit
loan renewals. The larger the permitted loan, the less likely a
borrower can repay in full on the next payday."
posted 3/31/00
