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Payday Loan Shops Exploit a Loophole

Consumer groups want regulation of “credit service organizations”

He had never walked into a payday loan shop, but Cleveland Lomas thought it was the right  move: It would help him pay off his car and build up good credit in the process. Instead, Lomas ended up paying $1,300 on a $500 loan as interest and fees mounted and he couldn’t keep up. He swore it was the first and only time he'd visit a payday lender.

Instead, Lomas ended up paying $1,300 on a $500 loan as interest and fees mounted and he couldn’t keep up. He swore it was the first and only time he’d visit a payday lender.

“It’s a complete rip-off,” said Lomas, 34, of San Antonio. “They take advantage of people like  me, who don’t really understand all that fine print about interest rates.”

Lomas stopped by the AARP Texas booth at a recent event that kicked off a statewide campaign called “500% Interest Is Wrong” urging cities and towns to pass resolutions calling for stricter regulation of payday lenders.

Supporters of the Stop Payday Abuse campaign include the Center for Public Policy Priorities, the NAACP, RAISE Texas and Texas Appleseed.

“It’s truly the wild, wild West because there’s no accountability of payday lenders in the state,” said Tim Morstad, AARP Texas associate state director for advocacy. “They should be subject to the same kind of oversight as all other consumer lenders.”

The lenders—many bearing recognizable names like Ace Cash Express and Cash America— came under scrutiny after the state imposed tighter regulations in 2001. But payday lenders soon found a loophole, claiming they were no longer giving loans and instead were just levying fees  on loans made by third-party institutions—thus qualifying them as “credit services
organizations” (CSOs) not subject to state regulations.

AARP Texas and other consumer advocates are calling on state legislators to close the CSO loophole, citing scores of personal horror stories and data claiming payday lending is predatory, modern-day usury.

They point to studies such as one issued last year by Texas Appleseed, based on a survey of more than 5,000 people, concluding that payday lenders take advantage of cash-strapped low-income people. The study, entitled “Short-term Cash, Long-term Debt: The Impact of Unregulated Lending in Texas,” found that more than half of borrowers extend their loans, each time incurring additional fees and thus going deeper into debt. The average payday borrower in Texas pays $840 for a $300 loan. People in their 20s and 30s, and women, were most vulnerable to payday lenders, the survey said.

“Predatory lenders don’t have a right to ruin people’s lives,” said Rep. Trey Martínez Fischer, D- San Antonio, who supports efforts to regulate CSOs.

Payday lenders and their backers counter that their opponents perpetuate inaccurate and negative stereotypes about their industry. They say payday loans fill a need for thousands of people who can’t get bank loans. Indeed, 40 percent of the payday borrowers in the Appleseed survey said they could not get loans from mainstream lenders.

Fees on these loans are high, but they’re not predatory because borrowers are told upfront how much they’ll owe, said Rob Norcross, spokesman for the Consumer Service Alliance of Texas, which represents 85 percent of the CSOs. The 3,000-plus stores are a $3 billion industry in Texas.

Some policymakers such as Rep. Dan Flynn, R-Van, said payday lenders are not going away, like it or not. “Listen, I’m a banker. Do I like them? No. Do I use them? No. But they have a large citizenry that wants them. There’s simply a market for it.”

But consumer groups insist lenders should at least come clean by dropping the CSO façade and submitting to state regulation. They want CSOs to operate like any other lender in Texas, subject  to licensing approval, interest caps on loans and penalties for misleading advertising.

“I’d just like them to be honest,” said Ida Draughn, 41, of San Antonio, who lamented paying $1,100 on a $800 loan. “Don’t tell me you want to help me when all you really want to do is take all my money.”
Hernán Rozemberg is a freelance writer living in San Antonio.

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