Last year, a major legislative effort to impose state regulations on lenders failed, and since then, Houston has joined Austin, Dallas, El Paso and San Antonio in passing a city ordinance to limit the loans. Now, the issue of so-called predatory lending is flaring in the gubernatorial race amid calls for the resignation of Gov. Rick Perry's appointed head of the governing board of the agency charged with regulating the credit industry and educating consumers, who is also an executive for one of the lenders.
In Texas, where payday and auto-title lending is a $4-billion-a-year industry with some 3, 500 businesses, there are no limits on fees or loan sizes. Supporters of the industry say lenders offer a needed service to consumers who have few options for short-term loans. Critics say the businesses prey on struggling Texans by charging high fees and trapping borrowers in a cycle of debt.
Texans get larger loans and pay higher fees than consumers in the nation as a whole, according to the Center for Public Policy Priorities, a liberal think tank that has pushed for state reforms. Texans spent $1.2 billion in payday and auto-title fees in 2012, and 35, 000 cars in the state were repossessed.
Texas was one of 27 states that had payday lending regulations that the Pew Charitable Trusts characterized as permissive in 2013. Fifteen states had no payday loan storefronts, and nine others had stores but also had strict requirements.
Some argue, though, that less regulation in Texas is better. Bill Peacock, vice president of research at the Texas Public Policy Foundation, a conservative think tank, said Texas has “one of the most competitive payday industries in the country.”
“So-called consumer advocates often complain that consumers are getting a bad deal, but consumers are voluntarily entering into these arrangements because they need access to capital, ” said Peacock, who opposes city ordinances and state legislation that increase regulation of the industry.
Payday lending became an issue in the governor’s race when the leading Democratic candidate, state Sen. Wendy Davis, D-Fort Worth, called for the resignation of William White, chairman of the Finance Commission of Texas, following comments he made to the El Paso Times in December. White, a vice president of payday lender Cash America, told that newspaper that nobody forces anyone into loans and that “people are responsible for their decisions.” The campaign of Republican gubernatorial front-runner Greg Abbott has pointed out that Davis voted to confirm White in 2011.
Davis has also drawn attention to a 2006 letter written by Abbott, the state’s attorney general, that she said created a loophole for payday lenders when it said there is no limit to fees that may be charged by lenders operating as credit service organizations. Abbott’s campaign has said Davis' loophole claim is false.
In the Senate, Davis has called for more state regulation of payday lending. Abbott campaign spokesman Matt Hirsch said Abbott would be "open to any and all reforms that will make Texas better."
An interest rate cap is a derivative in which the buyer receives payments at the end of each period in which the interest rate exceeds the agreed strike price. An example of a cap would be an agreement to receive a payment for each month the LIBOR rate exceeds 2.5%.
Similarly an interest rate floor is a derivative contract in which the buyer...