Payday Loans Receive Another Look in the Texas Legislature

More regulation of payday loans in Texas is currently being considered by the Texas Legislature. Multiple bills have been introduced that would alter how the payday loan business operates. A Senate committee considered a bill that would prevent companies from charging fees to arrange short-term consumer loan. Similar legislation is also pending in the House.

Payday loan regulation, such as the bills in the Texas legislature, would effectively curtail a payday lender's ability to collect fees for short-term loans, which the lenders rely on for their source of income. While this is seen as potentially damaging legislation for the lenders who provide these loans, many consumer advocates see it as a solid step in the right direction to prevent misinformation and poor lending practices.

What Is a "Payday Loan"?

The Federal Trade Commission describes how a payday lender functions: A borrower writes a personal check payable to the lender for the amount the person wants to borrow, plus the fee they must pay for borrowing. The company gives the borrower the amount of the check less the fee, and agrees to hold the check until the loan is due, usually the borrower's next payday.

The fees on these loans can be a percentage of the face value of the check, or they can be based on increments of money borrowed: say, a fee for every $50 or $100 borrowed. The borrower is charged new fees each time the same loan is extended or "rolled over."

A payday loan - that is, a cash advance secured by a personal check or paid by electronic transfer - is very expensive line of credit or loan. For example, if you borrow $100 for two weeks, a fee of $15 to $20 is charged. You write a personal check for $115, your $100 loan and the $15 fee for the loan.

The payday lender agrees to hold your personal check until your next payday. When that day comes around, either the lender deposits the check and you redeem it by paying the $115 in cash, or you roll-over the loan and are charged $15 more to extend the financing for 14 more days.

The cost of the initial $100 loan is a $15 finance charge making for an annual percentage rate of 391 percent. The payday lender wants you to roll-over the loan, because it means exorbitant interest rates continue to pile up for your small loan. Fees vary for two-week loans, but all tend to create immense annual percentage rates, ranging from 390 percent to 780 percent

Most consumers don't think of $15 or $20 as a great deal of money. Payday lenders take advantage of the seemingly "small" amount of the fee, but they know it makes for an astronomical interest rate on a short-term, small loan. If you have to roll-over the loan three times, the finance charge would climb to $60 to borrow the $100 for six weeks.

Putting Payday Lenders Out of Business?

The consumer service organizations (CSO) that represent payday lenders have cried foul, claiming most of their customers are satisfied. They allege that the pending bill in Texas would put them out of business.

The Houston Chronicle story notes that State Sen. Wendy Davis, author of one of the bills, denied she's trying to run the lenders out of business. "It's an issue of making sure that vulnerable people are not preyed upon in a predatory way," Davis said. "I'm hearing from people who are finding themselves literally in a debtors' prison as a consequence of these loans."

Many debtors who use payday loans when they are in a bind often find themselves swirling in debt and hounded by creditors. Some consumers are even forced to turn to bankruptcy after relying on payday loans to fund financial emergencies due to the high rates, however.

Further criticism prompting this legislation is also the notion that payday lenders take advantage of uneducated individuals who are experiencing financial difficulty. Without industry regulation, those who are in desperate need of money are forced to turn to payday lenders who charge the astronomical fees for small loans.

The CSOs, on the other hand, argue that they don't prey on poorly educated individuals. One company's website said typical cash-advance customers come from "college-educated, middle-income families" facing unexpected financial emergencies. "Contrary to the picture painted by the mainstream media, payday loans are not a ticket to bankruptcy or long-term financial problems," the Ace website states. "They are simply a convenient way to help you hold on until payday arrives."

Are Payday Loans a Treadmill to Debt?

Because CSOs are not currently regulated, like other lenders or banks, they have no limits on the fees and interest rates they can charge. Once they have a person hooked, the excessive fees can make it very difficult to pay the loan off. Payday loans are similar to credit card debt - it can be exceptionally difficult to pay the due amount in full when the fees keep adding up - but the fees are an even greater percentage of the loan than credit card interest fees.

This traps some consumers on a repeating pattern of having to keep rolling-over the loan, driving the annual rates ever higher. Eventually, the rates often become so overwhelming that consumers file for Chapter 7 bankruptcy or Chapter 13 bankruptcy to find relief.

The Texas bills that seek to regulate payday loans appear to have a broad range of support in this session of the legislature. Last session, similar bills were introduced, but died in committee. Tim Morstad, associate state director for AARP Texas said in the article the issue "has moved up our priority list this year because it is such a growing problem, too many people are getting stuck in the treadmill of debt and these lenders are completely un-accountable."

When the Debt Piles Up, Contact a Bankruptcy Lawyer

If you have fallen prey to the aggressive lending tactics of payday lenders and need financial respite, filing for bankruptcy may be an option to stop creditor harassment and secure a fresh start for your finances. A knowledgeable Texas bankruptcy lawyer will be able to help you evaluate your options and assist you in filing for bankruptcy, if necessary.