Groups try to reform loan practices

Consumers who use short-term lenders can be stuck in cycle of debt

A woman leaves an abusive relationship. Needing money, she takes out a $1,600 loan on her 1990s model truck.

She thought she had a year to pay off the loan, but she found out when she went to make her first payment that she didn’t have a year — time was up and the loan was owed in full.

Making what she thought was a responsible payment of $250 only reduced her principal payment by $14. Fearful she would lose her vehicle, the woman threw all her resources into the loan, which had fees that continued to mount, month after month.

The mounting debt eventually resulted in her losing her home.

Denton for Fair Lending, an alliance of concerned residents and nonprofit groups, has been compiling and sharing stories of borrowers trapped in a cycle of debt with the rest of the community. The alliance hopes that the stories will encourage the Denton City Council and others to reform short-term lending, often done through payday and title lending storefronts.

Another woman, an elderly widow, took out a personal loan in 2008 for $75 due to an unexpected expense. Unable to pay anything but the fees associated with the loan, the loan grew to $150, then $275, $350 and $650, which then required the title to her vehicle to guarantee.

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Over three years, the woman made more than $5,600 in payments for the original $75 loan she took out.

Stressed, the woman was hospitalized. She also incurred $4,000 in overdraft fees from her bank.

Kayce Strader, a member of Denton for Fair Lending, said that woman’s mounting debt “emotionally exhausted her, physically drained her and financially wrecked her.”

The alliance first shared these stories and others with the Denton City Council in December. One by one the stories of Denton residents impacted by short-term lenders were told. Denton for Fair Lending asked the City Council to add “predatory lending” to its lobbying agenda in Austin, which it did.

The group also asked the council to create a zoning change for the storefronts, similar to what’s been passed by Dallas, Austin, San Antonio and El Paso, and to add a restriction that the repayment of short-term loans occur in no more than four installments, similar to what’s occurred in other Texas cities.

“I want to be clear that we’re not against lending. We’re against predatory lending,” said Strader, who is also the director of development for Serve Denton, a nonprofit that helps other nonprofits. “We know that people need alternatives when they don’t have good credit. They need someone who will lend them money. We agree with that.

“We totally see that; we work for a nonprofit so we work with people all the time who have those needs. But what we’re against … we’re against putting people in traps because they need money.”

According to information being shared by Denton for Fair Lending, the average payday loan borrower in Texas will pay $840 for a $300 loan.

Strader likened the current loan practices to a vendor selling someone a toaster that will burn a house down, even though it is the only toaster the buyer can afford, Strader said.

“We don’t want to put anybody out of business. We want to keep families in business, and so we want to put some restrictions on a business that has none,” she said. “This isn’t a way to get out of debt, it’s a way to get into debt, and we want to protect families from that. If these companies would provide responsible loans that will allow families to pay back in a reasonable manner, then we welcome them in our community, but right now they’re not doing that.”

The alliance is seeking restrictions similar to those that govern other industries and businesses, Strader said.

“We’d like to add those restrictions so that they can be a responsible member of our business community that doesn’t harm families but helps them,” Strader said.

According to Joe Sanchez, associate state director for advocacy for AARP Texas, 70 percent of Texas payday loan borrowers cannot pay their loans back in the initial term.

A recent poll conducted by AARP Texas asked people ages 45 and older whether Texas law should be changed to cap the annual percentage rates and fees on short-term loans. The poll showed 63 percent of older Texans strongly agree that state law should cap the interest rate and fees that such businesses charge borrowers, Sanchez said. About three-fourths of the respondents strongly supported government action to lower the interest rates and fees associated with short-term loans, according to the poll.

Representatives of local nonprofit and faith-based organizations say they’re doing what they can to help people affected by high-cost, short-term loans.

Serve Denton is partnering with other local nonprofit groups to “communicate stories about the issue, monitor city and state action, and help ‘be the word’ put about alternatives such as financial literacy programs and United Way of Denton County’s VITA [Volunteer Income Tax Assistance] program that helps many families save fees about the size of an average payday loan,” Strader said.

Gary Henderson, president and CEO of United Way of Denton County, said the office hears complaints of predatory lending, a little from its clients, but more so from other organizations the agency works with, such as Hope Inc. and Interfaith Ministries.

They realize the low-income community is under a lot of pressure to be able to gain financial stability, and that’s why those groups are working on initiatives to help, Henderson said.

Beginning this summer, Henderson said, they will launch a beginning finance program.

“It [the program] will begin with basic budgeting, followed by crediting management and a Bank On Denton program,” Henderson said.

He said similar Bank On programs have become widely successful lately. They essentially give people a second chance at banking who otherwise would be turned down. United Way will soon start meeting with community banks and credit unions to help organize this effort.

According to Henderson, 23 percent of households in Denton are “underbanked,” meaning the residents have an account but continue to rely on alternative financial services, such as check-cashing services, payday loans, etc., to take care of the household.

All of his statistics are pulled from various surveys, including the American Census Survey.

“Getting the community to understand the depth of this problem is the critical first step in solving these issues,” Henderson said.

In the meantime, United Way provides assistance through its VITA program. The program partners with the Internal Revenue Service as a nonprofit tax center for low-income families, Henderson said.

The program runs through April 15, when federal income taxes are due, and has grown to five locations across the county this year. Two of those are located in Denton, at North Branch Library and Vision Ministries.

“So far, we have helped 329 low-income families prepare their taxes free of charge,” Henderson said. “We plan to have an overall 40 percent increase in providing assistance, compared to last year, and that’s thanks to all our hardworking volunteers.”

Michael Pirtle, director of Vision Ministries, said organizations that help pay utilities and rent tend to see more clients who have taken out a short-term loan.

Both Strader and Pirtle are hearing from leaders of nonprofits who are finding that money that would have gone to household bills is going to pay off short-term loans. The borrowers must then come to nonprofits for assistance.

Vision Ministries offers a food pantry, a clothing room and budget counseling. Pirtle said the organization will start a job training program this month and will soon offer a faith and finance class. Classes have been offered in the past, he said, but most financial management help has come in the form of one-on-one counseling sessions.

Today, the City Council is expected to consider the first of two ordinances regulating short-term lenders operating in Denton, just as the Texas Legislature takes up the issue of whether to pre-empt cities from making such rules.

Dallas adopted a restrictive ordinance in 2011, which was later challenged by the industry in a 2012 lawsuit. However, a Texas district court upheld the city’s rules. Austin, El Paso and San Antonio have also adopted ordinances regulating short-term lending. 

The Texas Senate Business and Commerce Committee is scheduled to hear testimony today for Senate Bill 1247, the companion to House Bill 2706, which includes a measure to pre-empt cities from making ordinances that regulate short-term lenders. 

Staff writer Peggy Heinkel-Wolfe contributed to this report.

BRITNEY TABOR can be reached at 940-566-6876. Her e-mail address is btabor@dentonrc.com .

MEGAN GRAY can be reached at 940-566-6885. Her e-mail address is mgray@dentonrc.com .

ABOUT THIS PROJECT

This is the third in an ongoing series about short-term lending. The Denton Record-Chronicle news staff gathered a number of government records under Texas open-records laws to prepare this series as part of Sunshine Week 2013. To determine the scope of payday and title lender presence in Denton, we first gathered information from Reference USA, available through the Denton Public Library. That database uses information reported to the Occupational Safety and Health Administration on types of businesses and later confirmed by Reference USA.We checked that data not only by requesting registration and compliance records from the Texas Office of Consumer Credit Commissioner — a year-old law requires payday and title lenders to register with the state — but also by driving to listed and known locations.

We also requested Uniform Crime Reporting data, as reported by the Denton Police Department to the Federal Bureau of Investigation, for 2008 through 2012. We used database and mapping tools to examine the data.

Sunshine Week began in 2002 with the Florida Society of Newspaper Editors after the Florida Legislature proposed scores of exemptions in that state’s open-records laws. Since then, Sunshine Week has grown into a national initiative to promote the importance of open government and freedom of information.