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The Basics

What are payday and auto title loans? >>
Payday loans are small cash advances – due in full, plus interest and fees – by the borrower’s next payday, typically in two weeks. These loans are secured by a borrower’s post-dated check or electronic access to a debit account. If a borrower defaults, they incur both insufficient funds fees from the payday lender and overdraft fees from the bank. Average payday borrowers get back-to-back loans many times before they are able to pay the loan in full and end up paying many times the original loan amount. In Texas these loans carry annual percentage rates of upwards of 500%. An average Texas payday borrower pays $840 to repay a $300 loan. An auto title loan is almost the same as a payday loan, except that a car title is used to secure the loan instead of the borrower’s next paycheck. Like payday loans, they carry extremely high interest rates and must be paid in full, plus interest and fees, by the end of a short loan term. Auto title loan borrowers can end up losing their car even after paying hundreds–or thousands—of dollars in fees and interest. In short, this is usury. Payday loans and auto title loans are defective products designed to keep consumers trapped in debt.

What is the loophole? >>
A CSO, or Credit Services Organization, is supposed to help people clean up bad credit. Instead, the Texas law governing CSOs is being exploited as a loophole. Payday and auto title loan outfits use it to charge high fees for loans that trap people in debt. They use the loophole to get around Texas laws that cap rates and fees for consumer loans, by claiming that they are not lenders. They charge excessive fees to broker and guarantee high-cost loans. For example, a customer who takes out a $300 payday loan owes $361.07 at the end of the two-week loan term. The CSO earns a $60 “fee” and the “lender” earns $1.07 in interest. If the borrower cannot pay the loan back in full, the same “fee” and interest charges apply again two-weeks later. CSOs often charge the $60 loan fee over and over again for the same loan. If the borrower must extend the loan nine times before paying it off, which often happens, the CSO earns $540 in fee income and the lender earns $9.63 on the $300 loan. Who is the real lender here?

Who is Targeted

Payday lenders depend on repeat borrowers for the bulk of their revenues—not on borrowers with an occasional financial emergency. >>
Payday borrowers take out an average of 8 to 9 loans annually, and most typically take these loans consecutively rather than spaced periodically throughout the year. Though Texas does not collect any data on payday borrowers, our neighbor to the north, Oklahoma, does. According to state data published in March of 2009, payday borrowers used 9.3 loans on average and over 77% of payday lender business came from borrowers using 9 or more loans every year. The borrowers with the highest number of loans used more than 40 in a one-year period. Payday lenders depend on this cycle of debt cause by back-to-back repeat borrowing despite their marketing messages that payday loans are for occasional, infrequent use. The CEO of Cash America noted that “you’ve got to get that customer in, work to turn him into a repetitive customer, long-term customer, because that’s really where the profitability is.” Likewise, when asked whether Advance America could support a proposal to limit borrowers to five payday loans a year, one of their Vice Presidents noted that they would be opposed because a five loan per borrower limit would cause them to go out of business.

Women, African Americans and Hispanics constitute the majority of payday borrowers. >>
Two recent Texas studies found that women made up almost 60 percent of payday borrowers. African Americans were the most likely to take out payday loans, 30% of borrowers were black and Hispanics comprised the largest segment of payday borrowers. A study by the California Department of Corporations found that African Americans and Latinos accounted for over half of payday borrowers. Another study of California neighborhoods found that payday lenders are concentrated in African American and Latino neighborhoods.

The Problem

Auto title lending risks repossession of a major family asset. >>
Car title loans are typically single payment loans secured by title to the family vehicle owned free and clear. A national survey by the Consumer Federation of America found that small car title loans typically cost 300% APR. Failure to repay can result in repossession. The Tennessee Department of Financial Institutions reports that over eighteen thousand vehicles were repossessed in 2006. The Virginia Attorney General settled a complaint against one title lender who had repossessed 12,000 cars in less than two years. According to Virginia Department of Motor Vehicle data, title lenders obtained 6,524 repossession titles needed to sell cars lost by borrowers in 2008. While title lenders obtained less than thirty percent of supplemental liens in Virginia in 2008, they accounted for over ninety percent of repossession liens. Auto Title Loans are typically given without any regard for the borrower’s ability to repay the loan. Lenders are able to do this because the loan is secured by a car title, thus the lender is protected if the borrower defaults. A 1999 Illinois survey found that car title loan borrowers earned an average salary of less than $20,000. By loaning money to people who are unable to repay, the lender effectively guarantees defaults. Texas does not monitor or regulate auto title loans. The state cannot provide any data on the number of cars repossessed by auto title lenders. This is an expanding business in Texas, with new lending outfits appearing in neighborhoods across our state. The average loan fee on a one-month $4,000 auto title loan in Texas is over $1,000. This fee is due in full at the end of each month that the loan is outstanding. It does not pay down the loan amount and must be paid to avoid repossession of the car. To pay off the loan, borrowers must come up with the full loan amount plus the fee and interest, over $5,000, to pay in one balloon payment. Allowing these lenders to continue to expand with no state oversight or limits on their fees is a recipe pull more Texas families into poverty, as they lose their car and can no longer travel to work or access basic necessities.

Payday loan borrowers are worse off than consumers who have no access to payday loans. >>
Colby College researchers simulated families trying to pay bills in spite of budgetary constraints over a 30 month period. “Borrowers” who used the typical volume of payday loans per customer per year for this industry were found to be worse off financially than those without access to payday loans. In North Carolina, where small loans were recently capped at 36% interest, researchers concluded that the absence of high-cost payday lending has had no significant impact on the availability of credit for households across the state.

Using payday loans causes financial hardship for families. >>

A University of Chicago Business School doctoral student compared households in states with and without access to payday loans over a five year period and found that access to payday loans increases the chances a family will face hardship, have difficulty paying bills, and have to delay medical care, dental care, and prescription drug purchases. Studies also show that payday loans increase the likelihood of overdrafting a bank account and contribute to, rather than alleviate financial hardships. Things are no different in Texas. According to an estimate by the Center for Public Policy Priorities, the typical Texas family is unable to pay the short-term interest on a $300 payday loan and keep up with necessary household expenses. A Texas survey of low-income individuals found that those using payday loans tended to use them for recurring monthly expenditures like paying bills, buying food, and paying rent, emphasizing the likelihood that using a payday loan will only put people further behind financially. These finding are bolstered by findings in the Detroit Area Study (DAS), conducted by a University of Michigan law professor. Comparing payday loan users with similar low to moderate-income households in Detroit who did not use payday loans, the DAS found that payday loan users had almost three times the rate of bankruptcy, double the rate of evictions and phone cut-off, and almost three times the rate of having utilities shut off.

Using payday loans increases the chance of losing a bank account. >>
Harvard Business School researchers examined involuntary bank account closures in states where payday loans are available and states where these loans are prohibited to determine the impact of loan availability on account closure. Advocates argue that using payday loans leads consumers to overdraw accounts while lenders claim that the ability to get payday loans saves consumers from otherwise overdrawing their accounts. The study found that an increase in the number of payday loan outlets in a county is associated with an eleven percent increase in involuntary bank account closures, even when other variables such as income and poverty rate are taken into account. To test the theory, researchers looked at Georgia, a state that bans payday loans but is surrounded by states that permit the product. Counties at least 60 miles from the border with payday loan states had a 15.6% decline in account closures when Georgia expelled payday lending.

Payday loan users who also have credit cards are twice as likely to become delinquent on the card. >>
Researchers at the Chicago Federal Reserve Bank, Vanderbilt University, and the University of Pennsylvania examined a large sample of payday loan users who also had a credit card from a major issuer. They found that taking out a payday loan makes a borrower almost twice as likely as other credit card customers to become seriously delinquent on their credit card during the next year. For all credit card users, the seriously delinquent rate is 6% while for payday loan borrowers in this sample, the rate is around 11%.

Payday loans have a fifty-fifty chance of causing defaults in the first year of use. >>
Researchers at Vanderbilt and the University of Pennsylvania examined a large sample of payday loan files at a Texas payday lender and found that over half (54%) of borrowers defaulted on loans during the first year. By the time loans are written off by the lender, borrowers have repaid fees equaling about 90% of their initial loan principal but are counted as defaults for the full amount of the loan.

Using payday loans causes borrowers to file for bankruptcy. >>
In a large Texas study, researchers found that payday borrowers were about twice as likely to file for bankruptcy in the next two years. They filed for bankruptcy at higher rates than similarly situated payday loan applicants who were turned down for payday loans. And, the bankruptcy impact was strongest on women, blacks and homeowners. When they filed for bankruptcy, their payday loans accounted for about 11 percent of their total annual interest burden.

Front-loaded high fees hide the true cost of credit. >>
Credit costs include interest and fees which in combination can result in exorbitant annual interest rates if all fees are included in the calculation. Research indicates that consumers are slow to grasp the impact of high fees which makes front-loaded high fee credit products so dangerous for our communities and why all loan costs should be regulated and included to calculate usury rates.

The Solution

Low- and moderate-income households use a variety of credit and non-credit options and strategies to deal with financial shortfalls, and are thus unaffected by the absence of payday lending. >>
A study commissioned by the North Carolina Commissioner of Banks on how families were faring after payday lenders left the state found that they used a variety of credit options to deal with a financial emergency, many of which were much cheaper than payday loans. In addition, non-credit strategies such as negotiating a different payment date, putting off a purchase until payday, and budgeting were also used to smooth financial shortfalls. This abundance of options is consistent with the payday lending industry’s own survey findings that less than ten percent of payday borrowers reported no other credit alternatives. Overall, the North Carolina study finds that households do not miss payday lending and had a negative view of the product, thinking it harms more borrowers than it helps. Those who had been payday borrowers in the past were glad they no longer had the temptation of what they viewed as an expensive product that was easy to get into, but hard to get out of.

States and local communities can take action to curb predatory payday and car title lending. >>
To date, 15 states and the District of Columbia have implemented or enforced rate caps of around 36% APR. These states include Arkansas, Texas’ neighbor to the east. The Arkansas Attorney General has been prosecuting high-cost lenders for violating state usury laws. Texas communities have begun to stand up to high-cost payday and auto title lenders. Communities like Richardson, Mesquite, San Antonio, Irving, and Little Elm have passed local ordinances controlling the spread of predatory financial services in their communities.