Amid stories of major statewide budget shortfalls, an anemic recovery from the economic recession, and devastated local economies in the Gulf Coast region, wouldn't it be nice to hear some good news for hard-working Texas families struggling to afford the basics? Wouldn't it be nice if there was a quick, relatively simple way to help prevent families from falling into poverty—at no cost to taxpayers? Given the current state of financial affairs in Texas, you might say it's too good to be true, but a growing group of consumer-protection advocates would disagree.
The campaign, 500% Interest is Wrong, seeks to close the loophole that allows Texas' credit service organizations (CSOs)—the payday and auto title loan storefronts that are an all-too-common sight in middle- and low-income neighborhoods—to avoid the controls, oversight, and consumer protections that banks and credit unions are subject to. In the absence of these regulations, CSOs are able to charge fees that average $15-$20 per $100 loan. As items in the Dallas Morning-News, the Austin American-Statesman, and even Newsweek in recent days help explain, the fact that these loans must be paid in full after two weeks means many borrowers must take out a subsequent loan and pay the fees over again, making loan fees the equivalent of a 300-500% annual percentage rate (APR). Studies have shown taking out a payday loan makes a borrower more likely to file for bankruptcy, struggle with mortgage, rent, and utilities payments, and delay seeking medical care.
For those issuing the loans, however, payday lending is big bucks. Each CSO pays only a $100 annual registration fee to the Secretary of State, regardless of how many storefronts they operate, but the fees collected by Texas' estimated 2,800 payday lenders average over $500 million annually.
Other states have already recognized how loan debt can trap families in a cycle of poverty. Georgia has taken steps to eliminate payday lending abuses by instituting an interest rate cap that accounts for loan fees, while North Carolina closed payday lending stores altogether in 2006. A University of North Carolina study found this decision has had no significant impact on credit access. Instead, among 159 households that had experienced a recent financial shortfall, those positively affected by the absence of payday lending outnumbered those negatively affected by more than three to one. To learn more about payday lending and what is being done to curb this practice, see my recent policy paper on Preventing Poverty through Asset Building.
Requiring consumer lenders and loan arrangers to comply with existing licensing and consumer protection laws will not cost taxpayers; rather, it will put money into the state's coffers by increasing the spending power of low-income families, over a quarter of whom, according to the Federal Reserve's 2007 survey of consumer finances, paid over 40% of their income in debt payments.
There is no one solution that will keep all families out of poverty during tough economic times. But in a year when the outlook for new state-funded poverty alleviation programs is bleak, finding a cost-free way to address the root of many families' financial woes is indeed a bit of welcome news.
