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Press Release |
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AUSTIN, TX -- Small consumer loans at usurious rates averaging nearly 800 percent (APR interest) are victimizing thousands of Texans while the lenders use the state's criminal justice system as a collection agent, according to a report released today by the Southwest Regional Office of Consumers Union, publisher of Consumer Reports.
The practice has mushroomed in Texas, prompting Consumers Union and AARP on Thursday to call on Attorney General John Cornyn and Consumer Credit Commissioner Leslie Pettijohn "to devote substantial resources toward investigating and pursuing enforcement actions to stop payday lending in Texas."
Texas' constitutional and statutory provisions ban usury - the act or practice of lending money at an exorbitant or illegal rate of interest. But lenders have found clever ways to disguise their transactions and claim that because they "do not make loans," the state's usury laws do not apply to them.
"It's a wolf in sheep's clothing and thousands of working Texas families are being victimized," said Rob Schneider, a CU senior staff attorney. "Consumers who take these high-cost loans are often forced to renew them or fall behind on other financial obligations, creating a vicious cycle that exacerbates their problem."
The transactions share two common features. First, they charge "fees" equal to interest rates of several hundred percent per annum. Second, lenders require a personal check as collateral for the loan. If a borrower cannot repay or renew the loan at the end of the loan period - typically 14 days, the lender cashes or threatens to cash the check. Borrowers with insufficient funds to cover the check even risk criminal "theft by check" charges if they cannot keep up with the steep renewal payments.
The Texas Constitution bans imprisonment for loan debt. It is not surprising therefore that among the proponents of reform today in Texas are Justices of the Peace, who seek to limit the use of criminal laws to real criminal acts. The CU report calls on the Legislature to make it illegal for lenders to pursue or threaten to pursue hot check collection against borrowers on these kinds of loans.
"It is unconscionable that these lenders use the criminal hot check collection system to enforce these high-cost loans," said Wilhelmina Gladden, Chair of AARP's State Legislative Committee. "The threat of criminal hot check prosecution is a powerful tool lenders use to get people to renew these loans that should not have been made in the first place."
In its survey, CU talked to 27 local cash advance lenders in Austin, Dallas, Killeen and Waco over a two-week period in January 1999. These companies advertise in local phone books and in the Greensheet. The authors also reviewed consumer complaints filed against these types of companies with the Office of Consumer Credit Commissioner (OCCC).
The majority of lenders surveyed - 12 companies - were "sales-leaseback" companies that claim to buy home appliances from their customers and lease them back for a "rental fee." Also popular - with eight companies - were fast cash advertisement companies which sell ads in dubious publications to customers who need cash. Three companies offered "cash back on your check" and four others were catalog sales companies that sell catalog certificates to customers who need quick cash.
Both the companies that sell ads and catalog certificates claim the customer is purchasing an item and they are charging a fee for that item.
Many of the consumer complaints reviewed by CU were disconcerting. One customer of Skyline Leasing compared his loan experience with "a form of slavery because you can never get to the point of paying it off." The customer said: "I had been a faithful customer but my health is now affected by this and it is now a long nightmare."
A customer of The Check Place said: "I borrowed $2,500 and was told to write a check for $3,325 to be paid in cash less than a week later [$825 interest]. When I was unable to pick up the check, I was told that I would have to pay an additional $300 per day until it was paid or the check would go to the D.A."
One Cash for Lease customer whose account became delinquent told about how details of his personal contract were divulged to his fellow co-workers and supervisors. "I feel like this was a direct violation of my rights as a consumer and feel embarrassed that so many of my fellow employees now know so much about my personal business."
Said Schneider: "Too many Texans are falling into this trap and are unable to keep up with their growing debt. They're being abused by a system that is currently illegal, but exists, in Texas. It's time for state officials to step in and do something about it."
