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Regulators outline rules on short-term loans

Profile image for By Peggy Heinkel-Wolfe
By Peggy Heinkel-Wolfe

Federal regulators unveiled a plan Thursday for new rules meant to end the cycle of debt that often comes with payday and title loans.

The Consumer Financial Protection Bureau proposed requiring that lenders operate one of two ways: either make sure the consumer can afford the short-term loan before making it or comply with restrictions that keep the loan’s costs from ballooning and becoming unaffordable.

The Denton City Council adopted local regulations in 2013 in response to concerns brought by Denton for Fair Lending, a local coalition of churches, nonprofit groups and others concerned about predatory lending. A Denton Record-Chronicle investigation in 2013 found a sudden proliferation of payday and title lending stores opening in the city, with some residents reporting spending hundreds and even thousands of dollars to repay loans of just $150 to $500.

The proposed federal rules represent the agency’s first exercise of its powers under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 in relation to short-term lenders.

Agency officials held a hearing in Richmond, Virginia, that took more than two hours of testimony from lenders and borrowers alike. Lenders said they provide a needed service to people who need cash and have nowhere else to turn. Borrowers and consumer advocates said the loans needlessly trap people in a cycle of debt that is dangerous to the economy.

The announcement represents the first step in a formal process of federal rule-making that is expected to take another six months to a year to complete.

Pat Smith, outreach director for Denton Bible Church, said he tries to remain optimistic that the new rules will provide relief.

“I believe there will be a lot of pressure to make the rules more favorable to the [financial] industry,” Smith said.

He said Denton’s rules had a big impact, with a number of lenders closing their storefronts in the city. Previously, Vision Ministries and Giving Hope — two local charities that help people who are homeless or at risk of becoming homeless — found that about half the people coming to them were in financial trouble because of a payday or title loan. Now, that’s down to about about 1 in 5, Smith said.

In addition, he said he accepted an invitation from lawyers for Ace Cash Express to discuss his advocacy over breakfast recently. He said the attorneys, who argued that the business was not predatory, told him their business was down 80 percent in Denton.

A trade association sued the city over its ordinance in 2013, and then dropped the case when its standing to do so was questioned. Ace Cash Express filed a lawsuit the same day that the trade association dropped its case. That case remains pending in the Second Court of Appeals.

Denton is among about 40 Texas cities that have adopted local rules governing payday and title lenders. Whether the squeeze between local and federal rules will push through reform at the state level remains to be seen, according to Ann Baddour of Texas Appleseed, a nonprofit organization of volunteer lawyers who work on social issues.

The Texas Legislature has been unable to adopt any meaningful reforms for years. More than 20 bills have been filed during the current session that regulate some aspect of the business.

Texas Appleseed is among a number of community and nonprofit groups that have been working for payday reform, including the AARP, the Texas Catholic Conference, the Christian Life Commission and the Center for Public Policy Priorities.

The federal Consumer Financial Protection Bureau doesn’t have the authority to set interest rates as the state does, Baddour said.

New research from The Pew Charitable Trusts released this week found that short-term loans made online have been increasingly detrimental to many borrowers, who are charged about 650 percent interest, on average, to repay. About 90 percent of payday loan complaints to the Better Business Bureau came from online borrowers. And 30 percent of those who borrowed online reported being threatened by their lender, according to Pew researchers.

House Bill 2808 mirrors key provisions of the municipal ordinances, including Denton’s, by limiting loans to four refinances, requiring 25 percent be paid down with each refinance, and making consumer protections easier to enforce.

HB 2808 has been referred to the House Investments and Financial Services Committee but has not yet been heard.

PEGGY HEINKEL-WOLFE can be reached at 940-566-6881 and via Twitter at @phwolfeDRC.