Apparent need lures lending storefronts to city
A Denton Record-Chronicle investigation has found payday and title lending locations proliferating in Denton near lower-income neighborhoods. At the same time, though a link was not immediately evident, financial crimes in the city have increased, records show.
Most of the storefronts have opened in Denton in the past decade, with 14 of the 39 businesses opening in the past five years and half of those operating in the city a year or less. The investigation also found that less than two-thirds of those storefronts appear to be licensed with the state.
In addition, the storefronts appear to cluster in and near Denton’s poorest neighborhoods.
Denton for Fair Lending, a group of concerned residents and nonprofits, shared their concerns of neighborhood blight around the storefronts with the Denton City Council in December. They requested that Denton adopt regulations similar to those now in effect for short-term lenders in Austin, Dallas and San Antonio.
Since then, El Paso has also adopted local regulations.
In response, the Record-Chronicle began an investigation as part of Sunshine Week 2013. Sunshine Week is a national initiative to promote public access to government records. The investigation examined both the number of lending storefronts in Denton and public data, both crime and census data, related to neighborhood blight.
According to the uniform crime data the city has reported to the FBI, nearly all categories of financial crimes increased in Denton in 2012. Those categories included burglaries, vehicle theft, embezzlement, credit/debit card abuse, forgeries and other fraud. Robberies and aggravated robberies, which had been declining steadily since 2008, shot up nearly 52 percent in 2012. Other thefts and larceny decreased in 2012, but only after rising steadily for the past three years.
Clustered, and increasing
Of the 39 businesses identified, the investigation found a few that operate multiple businesses in the same location. Others have two storefronts in the city.
A handful of short-term lending storefronts are clustered on East Oak and McKinney streets in east Denton. Six storefronts are located on Fort Worth Drive clustered near the intersection with Interstate 35E. Along Loop 288, there were at least nine storefronts, with nearly one in every shopping plaza. More than one-third are concentrated along University Drive, with four in a single shopping center on Sunset Drive.
According to U.S. Census data, the majority of the storefronts are clustered near the city’s poorest neighborhoods, only a few blocks away from neighborhoods with the highest unemployment rates and lowest annual incomes.
For example, the six storefronts in southern Denton, along I-35E and Fort Worth Drive, are huddled together near an area where the percentages of families living below the poverty level are some of the highest in the city, according to census data.
In the neighborhoods just to the west and to the north of Fort Worth Drive, 34 percent and 26 percent of families live below the poverty level, respectively. And to the east and south, 9 percent of families live in poverty.
Three storefronts, located between East McKinney Street to the north and East Oak Street to the south, are located in an area of Denton where 30 percent of families live below the poverty level.
Within those same areas, about 8 percent of residents are unemployed and per capita income is less than $20,000 annually, according to the data.
In comparison, in northwest Denton, where 60 percent of families make more than $70,000, the unemployment rate is 3 percent, and the percentage of families living in poverty is 1 percent — there are no short-term lending storefronts.
Storefronts for short-term lenders are also more likely to be found near neighborhoods where residents average in age between 19 and 34.
Five of the storefronts have been in Denton since at least 1984, the earliest date in the research data.
Registered or not?
Not all of the locations found during the Record-Chronicle’s investigation are licensed with the state. The Office of Consumer Credit Commissioner, a state agency that has licensed pawnshops for many years, began licensing payday and title lenders in January 2011.
In Denton, just 24 of these 39 businesses — classified either as credit-access businesses (17) or pawnshops (seven) — are licensed with the state.
The credit-access businesses, or the storefronts of the short-term lenders, can help customers improve credit scores or get a line of credit, or offer advice on both matters. But they are not the lenders.
About 70 percent or more of 3,400 to 3,600 short-term lending locations in Texas are controlled by larger corporations, said Rudy Aguilar, director of consumer protection with the Office of Consumer Credit Commissioner.
They set up that way in order to have a storefront that offers unregulated fees, he said.
“That storefront is the key to the whole transaction,” Aguilar said, adding that the store is the contact point.
In addition to licensing, the credit-access businesses are required to report more frequently than the pawnshops and the agency’s other licensees.
They must submit an annual report to the Office of Consumer Credit Commissioner in January and then a quarterly report every three months.
If the lenders are operating as both a pawnshop and payday lending business, they need both licenses. It is up to the licensee whether the business will be conducted as one and not the other, and the licensee will fill out applications accordingly, according to agency spokeswoman Dana Edgerton.
In other words, it’s unclear how many lenders are operating outside the law, or even whether there are more storefronts offering short-term loans in other locations in Denton.
“The fact that you can’t find out [who payday lenders report to] is scary,” said Melanie Vest, chief financial officer with DATCU and a member of Denton for Fair Lending.
There is a place for short-term lenders in the market, she said, but the state needs more rules and regulations.
The lender is limited by law to charge a 10 percent or less rate of interest on the loan, but the storefronts also charge a fee, which averages about $20 per $100 of the loan each time it is made or renewed, according to the quarterly reports by the state agency.
The bulk of the loan’s cost to the consumer comes from the fees, Aguilar said.
“We don’t have control or authority to cap the fee,” he said.
If a storefront is not licensed, the state agency investigates to see if it is making payday and title loans, he said. If it is, the agency tells the storefront a license is required. The storefront can be fined $10,000 for lending without a license.
If the lender still doesn’t comply, the state agency can issue a cease-and-desist order, requiring the storefront to stop activities and to refund some of the fees it charges.
The business of borrowing
Julie Hillrichs, spokeswoman for Consumer Service Alliance of Texas, a trade association for the storefronts and the short-term lenders, said some people are unable to obtain loans elsewhere and the short-term lenders help fill the vacuum, she said.
“There are citizens of communities that have found themselves short of cash in emergency situations,” she said.
Part of the increase in short-term lenders is because of the economic downturn, she said. The increase in the number of storefronts also is a popular alternative for borrowers.
“There wouldn’t be short-term lenders if there wasn’t a market for it,” Hillrichs said.
Late fees on utility bills and overdraft fees on bounced checks can be more costly than a short-term loan, she said.
“Our borrowers weigh their options and frequently choose to take out a short-term loan,” Hillrichs said.
According to a 2012 report by the Urban Institute, “Metros Vary Widely in Household Use of High-Cost Alternative Credit Products,” researchers found the Dallas-Fort Worth-Arlington area as having the highest use of high-cost, alternative credit, with most as loans given at pawnshops.
Overall, however, just 12 percent of U.S. households have ever used alternative credit, and that included not only payday and title loans, but also rent-to-own agreements and pawnshop and refund anticipation loans, according to national survey conducted in 2009 by the Federal Deposit Insurance Corp.
While that survey also found that “unbanked” households were more likely to access short-term credit than “banked” households, the survey counted just 8 percent of U.S. households reporting that they didn’t keep their money in a bank.
It is unclear how many of the city’s estimated 114,000 residents are accessing credit through storefronts where such lending is either their primary or secondary form of business.
Cody Garcia, manager of McBride Music and Pawn, said interest rates for pawnshops are fixed at an annual rate of 240 percent and they must hold collateral merchandise for at least 60 days.
McBride holds its collateral for 120 days, Garcia said.
“We don’t buy anything we can’t make money on,” he said.
The business is licensed through the state, which requires a report when it renews the license each year in June.
“There aren’t a lot of regulations, but they are strict about those regulations,” Garcia said.
Pawnshops have a stigma, he said, but not all pawnshops are the same. McBride Music and Pawn has been family owned since 1968.
Tax services businesses that offer refund advances are essentially arranging a loan with a bank, Aguilar said, adding that such businesses are affected by electronic filing and direct deposit. They are also registered through the state agency, but they are investigated only when a complaint is brought against them, he said.
Denton has 23 banks in 55 locations. Banks don’t offer short-term loans.
“The expense to put a file together isn’t worth it for a one-week loan or something like that,” said Danny Mitchell, president of First Security Bank.
Banks are required by law to put up credit reports, he said.
Small loans for people who need money before payday aren’t considered a “good risk” for a loan, he said.
“I think it [a short-term loan] takes advantage of the lower-income people — which is probably the majority of that going on — because they do charge quite a bit to do those loans, relative to the loan they put out,” Mitchell said.
He said there are different reasons people resort to short-term loans rather than bank loans.
“It’s a tough situation,” Mitchell said. “People that resort to payday lending, they’ve probably explored other options.”
The bank sees people write checks from their accounts to payday lenders, Mitchell said, adding that typically those are people running close on their balance, too.
Credit unions will work with customers on smaller loans, said Vest of DATCU.
DATCU will offer $200 and $300 loans and has lent $50 before, Vest said, if the customers qualify for it and already have a standing with the credit union.
“Obviously, your average loan amount is not $50,” she said.
The problem with short-term lenders, Vest said, is they offer high interest rates. Someone goes in for $500 and then rolls it into another loan until the debt becomes unmanageable, she said.
“It snowballs,” she said. Someone may take a loan for $500 and renew a couple times, and then the person owes $3,000, she said.
“We don’t want to see them in these situations that [involve] a $500 loan they can never pay back,” she said.
Taking out a loan can be an emotionally charged decision, and people in reputable professions can fall into it, too, she said.
Council member Kevin Roden, who works at the University of North Texas and has pushed for local reforms, said he is concerned that some of the lenders may be marketing to students in the way that credit card companies used to paper college campuses in the 1990s.
He drove by a billboard near campus where a short-term lender asked “Running on Empty?”
“It just hit me — it was geared toward college students,” Roden said.
Dallas passed rules in early 2011 regulating short-term lending storefronts, after residents there complained about blight and crime in neighborhoods where they proliferated. Those complaints had triggered the Consumer Service Alliance of Texas to commission a study in August 2010 by consultant David Kunkle, Dallas’ former police chief. He found no connection between the Dallas storefronts and crime.
“We’ve not been able to find any case where small short-term loan institutions raise crime rates or lower property values,” said Hillrichs, spokeswoman for the trade alliance.
Denton Police Chief Lee Howell said his department has not received complaints at the storefronts, although one was robbed in March 2012. Three men with guns and an inert hand grenade robbed Ace Cash Express on University Drive, emptying the cash registers and the safe, leaving the grenade behind in the safe.
In mapping the crime data, the Record-Chronicle found no immediately apparent connection between the storefronts and the increase in financial crimes.
Overall, crime had been trending down in Denton and the North Texas region since 2009 with some categories at 10-year lows in 2011, Howell said. There were increases in 2012 in some categories that brought Denton back closer to the 10-year average.
“I think a lot of the negative reporting that is being done about small short-term lenders and statistics involving crime and property values is politically motivated,” Hillrichs said. “It’s pretty clear that there are consumer interest groups that want to drive the industry out of business.”
That would start with a rate cap, Hillrichs said.
“A 36 percent rate cap will drive this industry out of business,” she said.
Because Denton is smaller and more compact than Dallas, Roden didn’t think the impact of short-term lending storefronts would concentrate in any one neighborhood.
“What we’re seeing on University Drive, it touches on many different types of neighborhoods,” Roden said, referring to the mile or so that runs between some of the city’s oldest neighborhoods to a few newer ones — and that has about 15 different credit-access businesses.
Denton community leaders have visited with those in Dallas who got that city’s ordinance through. The Denton City Council is expected to take up the matter Tuesday.
An ordinance regulating the storefronts, including how much they can charge and how often they can make high-cost extensions, will likely come first, city leaders said. Regulating the storefronts through zoning will likely follow, but that will take longer, Roden said.
City leaders know enforcement will be a challenge, Roden said, especially given how difficult it is to even find storefronts that are making loans. However, he thinks local communities are in a better position to protect themselves through their local governments than through agencies in Austin.
Moreover, he doesn’t hold out much hope for any tough new laws on short-term lenders from the Texas Legislature.
“We told the state we wanted them to get tough and tighten legislation, and it’s almost like they throw you a bone — ‘Look. We’re getting tough. We’re making them register,’” Roden said, adding that he wasn’t surprised not all the storefronts were even registered.
“As a local policymaker, I found the state registration system unhelpful to me,” Roden said.
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