WORKING TO END POVERTY. Predatory Lending 101: How You Can Take Action

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1 WORKING TO END POVERTY Predatory Lending 101: How You Can Take Action

2 Mission: To move 250,000 people permanently out of poverty by 2020 Vision: Unite all sectors of the community around identifying and eliminating barriers preventing families from moving out of poverty and into financial sufficiency.

3 The Coalition has focused its efforts initially on two priorities: Boosting the financial health of community members by promoting financial literacy and access to programs that build income, savings and assets. Countering the problem of predatory lending by advocating for changes to public policy and promoting consumer-friendly lending alternatives.

4 Why focus on predatory lending? Consumers are charged upwards of 500% APR on payday and auto title loans Service agencies and religious congregations report that the reason many come to them for assistance is because they are trapped in payday or auto title loans Huge increase in the number of payday and auto title storefronts in the last decade

5 What are Payday and Auto Title Loans? A payday loan is a small cash advance Collateral of a post-dated check or electronic access to a debit account Typically ranges from $300 to $500 Due in full plus interest/fees in 2 weeks An auto title loan is a larger cash advance Collateral is a car title Can be several thousand dollars Due in full plus interest/fees in shortterm, typically one-month If the borrower cannot pay the full amount at the end of a month, the loan company can take the car

6 The Payday Loan Debt Treadmill The Auto-Title Loan Debt Treadmill

7 What is the Impact on Consumers? Effective loan rates of upwards of 500% APR The average payday borrower in Texas pays $840 for a $300 loan. Many payday borrowers take out additional loans to cover previous loans in a vicious cycle Last year over 33,000 cars were repossessed due to auto title loans $326.6 million in fees drained from the local economy in North Texas

8 How Is This Legal?

9 The Texas Constitution ARTICLE 16. GENERAL PROVISIONS Sec. 11. USURY; RATE OF INTEREST IN ABSENCE OF LEGISLATION. The Legislature shall have authority to define interest and fix maximum rates of interest; provided, however, in the absence of legislation fixing maximum rates of interest all contracts for a greater rate of interest than ten per centum (10%) per annum shall be deemed usurious; provided, further, that in contracts where no rate of interest is agreed upon, the rate shall not exceed six per centum (6%) per annum.

10 Texas Finance Code TITLE 4. REGULATION OF INTEREST, LOANS AND FINANCED TRANSACTIONS, SUBTITLE B CHAPTER 342: CONSUMER LOANS Sec DEFERRED PRESENTMENT TRANSACTION The finance commission shall adopt rules providing for the regulation of deferred presentment transactions. Texas Administrative Code OFFICE OF CONSUMER CREDIT COMMISSION REGULATIONS CHAPTER 83, SUBCHAPTER A, DIVISION 6, RULE $300, 2 week loan = % APR

11 Credit Service Organization Loophole Credit Service Organizations are designed to: Support consumers in improving their credit rating Help consumers obtain an extension of consumer credit How the loophole works: Pays money to CSO. Never interacts with lender. Customer Charges high fees to arrange, collect, and guarantee loan. CSO (Payday or Auto Title Lender) $60.00 Provides loan capital at 10% interest. No direct relationship with borrower. Lender $61.07 fee and interest (plus $300 to pay off) $1.07 $300 two-week loan transaction

12 The Moral Case for Action: Zechariah 7:9-10 "This is what the LORD Almighty says: 'Administer true justice; show mercy and compassion to one another. Do not oppress the widow or the fatherless, the alien or the poor. Exodus 22:25 If thou lend money to any of my people that is poor by thee, thou shalt not be to him as a usurer, neither shalt thou lay upon him usury.

13 2012 Non-Profit Client Survey Supported by the Texas Catholic Conference, non-profit agencies including Catholic Charities, Goodwill, YWCA, Neighborhood Centers, and local assistance ministries surveyed clients throughout the state from April 15, 2012 to Dec. 15, 2012 regarding their use of payday and auto title loans 32% of survey respondents reported having turned to payday and auto title loans, up from 18.7% in the 2010 nonprofit survey a 60% increase.

14 What Can We Do? Establish common sense state regulations to protect consumers Promote local action to protect consumers Support small-dollar loan alternatives

15 Advocating for State Consumer Protections What Has Been Accomplished So Far? In 2011, State Legislature passed bills that require lenders registered as CSOs to: Register with the Office of Consumer Credit Commissioner, and the licensing fee will fund the Texas Financial Education Endowment Report on consumer and transaction data Clearly disclose fees, typical repayment patterns, and fees of comparable loans Post an OCCC helpline number for consumers Provide restitution to customers injured by a violation of CSO regulation or Finance Code In 2011, the Legislature failed to limit effective interest rates or limit rollovers and protect consumers from getting caught in a cycle of debt In 2013, the State Legislature failed to pass any legislation addressing predatory practices in payday or auto title lending

16 Promote Local Action to Protect Consumers What Has Been Accomplished So Far? The city of Dallas passed the first local regulatory ordinance in the state, which: Limits the loan amount based on consumer s income and ability to repay Limits the number of renewals allowed Requires the ability for a consumer to pay down the principal Similar regulatory ordinances have since been passed in 16 cities across the state, including Houston, Austin, El Paso, and San Antonio, and most recently Garland Many additional localities have passed zoning ordinances to limit the concentration of payday and auto title lenders These local ordinances build support for addressing the problem from the bottom up

17 Support Small-Dollar Loan Alternatives These six Texas loan programs are making a difference.

18 Sources and Additional Information TexasFairLending.org, Texas Fair Lending Alliance TexasAppleseed.net, Texas Appleseed Texas Constitution, Article 16 Texas Finance Code, Title 4, Subtitle B, Chapter &p_rloc=&p_tloc=&p_ploc=&pg=1&p_tac=&ti=7&pt=5&ch=83&rl=604, Texas Administrative Code, Chapter 83, Subchapter A, Division 6, Rule BankonDallas.com, Bank on Dallas Initiative