This month marks two years since San Antonio passed its payday and auto-title lending ordinance. While elected officials and local advocates say the law makes loans more manageable for consumers and helps the city monitor a largely unregulated lending industry, they point out that the state’s failure to cap sky-high interest rates and fees means payments are still unaffordable for many financially strapped borrowers.
Texas is often referred to as the wild west of payday lending, where payday and auto-title lenders operate without much regulation. They bill themselves as fast and easy ways to get a loan, all the while preying on consumers by not clearly disclosing interest rates and fees. This type of lending is illegal in some states, while others cap interest rates and fees. In Texas, a loophole in state law allows lenders to charge unlimited fees and interest rates, sometimes as high as 500 percent. Currently there is no limit to the number of times a borrower can refinance a loan, nor is there a limit on the number of back-to-back loans, and consumers are often saddled with high loan repayments for much longer than a traditional bank loan, according to the Texas Fair Lending Alliance. After the Texas Legislature declined to address the issue in Austin in 2011 and 2013, cities and municipalities across the state took matters into their own hands where and when they could.
San Antonio’s ordinance, in addition to requiring lenders to register with the City and allow city officials to inspect their stores, limits the size of a payday loan to no more than 20 percent of the borrower’s gross monthly income. An auto-title loan can’t exceed 3 percent of a borrower’s income or 70 percent of the value of the car. The ordinance also limits the number of refinances on a traditional payday or auto-title loan to three, and requires that installment-style loans be paid back in no more than four installments. Also, 25 percent of each payment must go toward reducing the loan.
“In the past, a payday lender could loan someone a very large amount of money and, theoretically, that person could be on the hook for that money, plus fees and interest, in perpetuity,” said District 1 Councilman Diego Bernal, who carried the ordinance to fruition in 2012. “Now, there immediately is a light at the end of the tunnel, and a fee and payment structure that allows them to pay off that loan in a short and manageable period of time.”
As of May 2014, 217 state-licensed lenders were in business in San Antonio, and all but seven of those were registered with the City, said Jim Kopp with the City Attorney’s office. Three of those seven also refused to let the City inspect their stores. The City has filed criminal complaints against the remaining companies for failure to register. The first criminal case involving a company operating two Power Finance locations in San Antonio goes to trial as this issue hits the stands. The Current’s request for comment from Power Finance’s San Antonio-based lawyer was not returned by press time.
Rob Norcross is with the Consumer Service Alliance of Texas, a payday and auto-title industry trade association with 16 member companies in Texas that operate approximately 3,000 of the 3,500 lender storefronts in the state. He said members of CSAT were frustrated that industry representatives weren’t involved enough in crafting the ordinances in Dallas and Austin that San Antonio’s is modeled after. Norcross questioned whether San Antonio’s mandated repayment period really is more manageable. Four installments, he said, makes payments bigger for consumers because it decreases the time over which the loan must be repaid.
“You have more people defaulting on loans because of more rigid repayment parameters,” he said. “I think at first there was a fear that because the borrowing limit was relatively low, it would lead to people taking out more than one loan at a time. We’ve been to city after city having conversations where we’ve said there might be a better, different way to do this.”
Bernal acknowledged that the repayment schedule is tight, but because the loan amount is tethered to a borrower’s income it protects consumers from getting in over their head with loans they can’t afford and could spend months or even years repaying.
But even as a borrower’s principal decreases with each payment, nothing stops lenders from charging the same high rates and fees, said Ann Baddour with the advocacy organization Texas Appleseed. Data from the state Office of Consumer Credit Commissioner show that from 2012 to 2013, the number of single- and installment-payment payday loans made in San Antonio decreased, but the total payment amounts for installment loans–the original loan balance, fees, and interest–increased. It’s a trend that’s happening statewide.
“At some point the state is going to step up,” Baddour said. “But we also know how these businesses are great at getting around these restrictions.”
Still, Baddour said, an important conversation about poverty and economic development is taking place.
“When a city’s struggling families are being put into a position where the main credit that they’re accessing is at best keeping them right where they are, and at worst pulling them down into financial calamity, it’s a big drain,” she said. “That’s money that could be going into the community.”
Local organizations such as the San Antonio Area Foundation, Goodwill San Antonio, and other advocacy and faith-based groups are exploring new ways to connect consumers with small loans while also providing financial education. Some models include employer-based loan incentives, partnerships between nonprofit organizations and financial institutions, or faith-based financial counseling.
“You shouldn’t be able to take advantage of poor people simply because they don’t have very good alternatives,” said Dennis Noll, executive director of the San Antonio Area Foundation, which convenes a coalition of organizations concerned about payday and title-lending reform. “It would be so much more powerful if we could loan consumers money and get them in structures that makes sense for them.”
Sandy is a local San Antonian who works for an advocacy organization involved in the issue. (She asked that her full name remain confidential.) Years ago, when she worked at a local hotel, she reluctantly went to a payday lender for a $200 loan to pay her overdue electric bill before service was cut off to the home where she and her family lived. She remembers sitting in her car in the parking lot for an hour before going inside.
“I kept asking about the interest rate, but they wouldn’t really answer any questions,” she remembered. “They were just focusing on the fact that it was so easy.”
Unable to pay back the loan on her next payday, Sandy rolled over the balance several times, and ultimately paid more than $600 over six weeks. She postponed paying her rent one month so she could finally pay it off and break the cycle.
“It was traumatizing,” she said.
(Disclosure: Garcia-Ditta previously worked for the Center for Public Policy Priorities, a statewide nonprofit, non-partisan public policy organization in Austin that works on this issue.)