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February, 1999
This article was written by the Consumers Union Southwest Regional Office.
Old Dog, New TricksSince the founding of the Republic, Texas has prohibited usury. Texas' constitution bans the practice and establishes the ability of the Legislature to regulate loan rates. The state's Credit Code clearly outlines the terms and conditions of a legal small loan, and these terms are quite generous. "Signature" lenders may charge more than 90% APR interest, including an up-front $10 fee to cover processing costs, and $4 per month per hundred borrowed. Like payday loans, signature loans are generally small, averaging $255 in 1995. And the market is booming. According to the Office of Consumer Credit Commissioner, signature lenders in Texas make more than 3.5 million loans totaling $1 billion annually. Lenders who loan more than $460 can charge $25 up-front and 18 percent "add-on" interest, or about 30 percent APR. "Cash advance" companies insist they are different because their process is simple, short-term and merely amounts to "cash back" on your check. Or because they actually purchase the borrower's goods. Or because they sell a service (advertising) or merchandise (catalog certificates). But after looking at the facts it becomes clear that there is no substantive difference between a signature loan and a payday loan, except that payday lenders charge substantially more, use a personal check as collateral, and try to disguise their practice. A "cash advance" loan is certainly simple. Cash-advance loan companies do not check customer's credit records. Instead, customers apply by phone and are approved based on specific criteria including full time job and monthly income (usually a minimum of $800 with two pay stubs in support), residency, and the existence of a checking account. The monthly income requirement is not absolute. For example, at least two of the companies surveyed allow customers to use household or other income if they don't meet the minimum requirements. A customer of Emergency Services in Houston told the OCCC that she got a loan although her income totaled only $586 per month. Emergency Services allowed her to give them her daughter's income. But signature loans are also simple. Like payday loans, a consumer can walk into a signature loan office and walk out with a small loan after minimal underwriting (the process for determining credit-worthiness). Like payday lenders, signature loan companies frequently take applications by phone and approve the loan while the customer waits. Signature lenders believe they are in the same business as the usurious payday lenders and regularly write into the OCCC to complain. For example one finance company had this to say: "I am sure you are aware of the flourishing non-licensed 'lenders' all over the state. I know you are as concerned as we licensed lenders are about, not only the 'black-eye' our industry is receiving, but also the energy that is being sapped from it." At most payday lenders, "renewal" is the only option if the consumer cannot pay the full amount owed in 14 days. But signature lenders also encourage customers to regularly refinance their loans. World Acceptance "actively markets the opportunity to refinance existing loans prior to maturity, thereby increasing the amount borrowed and increasing the fees and other income realized," according to its 1997 Form 10-K report to the Securities and Exchange Commission. The up-front fee is non-refundable and can be charged again upon refinancing, and interest is refunded using a formula favorable to the lender. Twenty-two payday loan companies surveyed allow customers to renew lease agreements by paying another fee. Only five companies in our survey limited their "service" to a one-time 14-day term. And of these, repeat customers may be able to renew if they have a strong payment history. Renewal policy varies. Two companies allow up to 5 renewals, and another 17 allow six or more. At most of these payday lenders, a customer who renews the agreement 3 or more times pays more in fees than the original amount of their loan. For example, one customer borrowed $200 from Instant Rental, a sale-leaseback company in Houston. The customer wrote an initial check for $200 plus a $68 lease fee that the company held for the 14-day lease term. The customer was unable to pay back the $268 when the term expired and extended the lease 14 more days for an additional fee of $68. He continued to do this every two weeks because he couldn't pay the $268. Every period his receipt showed a "declining balance" of $268 (similar to a loan receipt, except the "declining balance" did not decline). He ended up extending the lease 9 times-costing him $612 in total fees. At the end of the 9 periods (just a few months) he still had a "declining balance" of $268 to pay off, but had paid over three times the amount of the original loan ($200) in fees. Although they walk and talk like small lenders, payday loan companies claim that they are not loaning money and holding checks, but providing services. The primary service, however, is a quick cash loan under usurious terms. Of 27 companies surveyed in the three markets, 19 charge at least $33 in "fees" for every $100 cash advanced per loan period. Six companies charge $30 in "fees" for every $100 cash advanced, and two companies charge under $30 per $100 loaned. Twenty-five companies advanced the money over a 14-day or 15-day period, which translates to approximately 792% APR. The remainder (2 companies) advance the cash on a daily basis, charging customers a daily fee for cash borrowed. The Consumer Credit Commissioner and the Attorney General are responsible for enforcing the state's usury laws. Neither agency has pursued many cases in this area. One case filed by the Attorney General several years ago resulted in a District Court decision that a sale-leaseback was not a loan. However, this case was never taken up on appeal, so the case set no precedent. |
