City Regulation of Payday and Auto Title Lenders
January 9, 2014, Update
Questions about state regulators have prompted recent press reports and correspondence from senators. The El Paso Times ran and article on the subject, and three Texas senators sent a letter to the Chairman of the Texas Finance Commission asking for his resignation.
October 25, 2013, Update
Some cities, in addition to or in lieu of lender transaction regulations, have enacted various land use measures to address the proliferation of the lender storefronts. An informal survey of Texas ordinances prepared by Texas Appleseed is now available, as well as a report by national consumer groups.
August 23, 2013, Update
City officials interested in payday lending should know that, at the League’s Annual Conference and Exhibition on Thursday, October 10, a panel will discuss the ins-and-outs of this type of regulation:
Payday Lending: Are Cities the Last Line of Defense?
City officials across the state have seen the proliferation of payday and auto title lender storefronts. How can these lenders negatively affect your citizens? What has the state done (or not done) to reign in predatory lending practices? What happened during the 2013 regular legislative session that leaves cities as the last line of defense? In this session, you’ll earn the answers to these questions, how some cities are taking matters into their own hands, and about the lawsuits filed by the industry.
Scott Houston, Deputy Executive Director and General Counsel, Texas Municipal League
The Honorable Bill Spelman, Councilmember, City of Austin
Meghan Riley, Litigation Division Chief, City of Austin
Jerry Drake, Deputy City Attorney, City of Denton
Laura Gordon, Deputy City Attorney, City of El Paso
To register for the League’s Annual Conference and Exhibition, visit www.tmlconference.org.
August 2, 2013, Update
The Town of Flower Mound has become the seventh Texas city to adopt an ordinance. In addition, some cities asked about what fee is appropriate to charge for a permit under the League’s example ordinance. The Flower Mound ordinance sets the registration fee at $50, and that is common. Of course, the common law rule is that a fee should approximate the amount needed to administer the ordinance. Thus, the fee amount can be set by each city accordingly.
In addition, the Flower Mound ordinance provides that “any lot containing a credit access business establishment shall be located at least one thousand (1,000’) feet from any lot containing another credit access business establishment, as measured in a straight line between the nearest points of one lot to the other lot.” To view the ordinance, click here. To view the agenda cover sheet, click here.
July 26, 2013, Update
“Our efforts to reform payday lending in the state legislature are at a stalemate. To make progress at the state level, we must act locally by encouraging our city leaders to pass city ordinances regulating predatory lending.”
-- Rep. Mike Villarreal (D – San Antonio), Chairman of the Texas House Committee on Investments and Financial Services
While many other states have enacted laws to restrict predatory lending practices, meaningful reforms have failed to pass the Texas Legislature in the last three sessions. Free of any statewide cap on lending fees, limits on loan rollovers, and other restrictions, the number of payday and auto title loan stores in Texas has exploded with over 2,000 new storefronts opening in the last six years. In the absence of state action, Texas cities are stepping up to adopt ordinances to protect their citizens from some of the worst predatory practices of this industry.
Payday lending is a practice where a person can walk into a store, typically located in a strip mall, and take a cash advance on his or her next paycheck. Most such businesses offer a similar cash advance with a car’s title as collateral. The interest rates on the loans are very high. In fact, legal loopholes used by the lenders exempt them from the state’s usury laws.
Interest rates, when fees are included, often exceed 500 percent APR. Fifteen states limit the APR to 36 percent. The products are marketed as two-week or one-month loans, but the vast majority of borrowers refinance, often six to ten times. In addition to the traditional short-term payday loan, companies have started to offer expensive longer term installment loans. One company offers a five-month installment loan for $1500. Customers must pay back over $3,862, an APR of 612 percent.
Borrowers who fall behind on payments can refinance multiple times; meanwhile, the interest and other fees keep piling up. It’s not uncommon on the auto title lending side for people to lose their car altogether after multiple refinancings.
In Texas and across the country, the payday and auto title lender industry (also known as the “credit access business”) has grown dramatically. The Texas Office of Consumer Credit Commissioner (OCCC) reports that there are an estimated 3,000 credit access business locations in Texas alone. With the proliferation of the credit access business industry comes increased concerns about the harmful effects of Texas citizens entering a cycle of debt and dependency. Some cities are also concerned about public safety and the effect the businesses may have on property values. As a result, both the state legislature and a handful of Texas cities have taken steps to regulate this industry.
In 2011, the legislature addressed some of these concerns by passing legislation that both requires credit access businesses to provide consumer disclosures regarding their loan products, fees, interest charges, and percentage rates, as well as requires them to obtain a license with the OCCC (operating under the oversight of the Finance Commission of Texas), which in turn has some ability to examine these businesses. Some Texas cities viewed the 2011 legislation as insufficient to address the growth in the credit access business industry in their communities, and have since adopted ordinances that place additional restrictions on these businesses. The ordinances that have been adopted include zoning restrictions, substantive business regulations such as a limitation on the total amount of the loan, or both.
Several bills were filed during the 2013 legislative session that would have increased regulation of the credit access business industry. Other bills were filed at the behest of the credit access business lobby that would have preempted all city ordinances regulating the industry, including (in some cases) generally-applicable zoning and other health and safety ordinances. In the end, no legislation dealing with payday and auto title lenders passed in 2013. Consequently, under current law cities are not expressly prohibited from adopting ordinances regulating the credit access business industry in any way, including ordinances restricting business practices.
In response to the state legislature’s failure to adopt any substantive statewide regulation of credit access businesses, a handful of cities have adopted ordinances aimed at ending the cycle of debt and helping borrowers to be successful in paying back their loans. As of the spring of 2013, the cities that adopted ordinances were Austin, Balcones Heights, Dallas, Denton, El Paso, and San Antonio. There are likely to be more at the time of this publication. All of these cities – except for Balcones Heights – have been sued by the credit access business industry, with the industry claiming that the cities are preempted from regulating credit access businesses since the legislature gave the OCCC some authority to regulate in 2011. (Balcones Heights has suspended enforcement of its ordinance pending the outcome of the San Antonio lawsuit.)
When payday and auto title lenders argued before the legislature for preemption of all city ordinances regulating credit access businesses, chief among their policy arguments was the notion that it would be too administratively difficult to keep track of the different “patchwork of regulation” that exists from city to city. This argument falls flat in two ways. First, only six out of roughly 1,200 Texas cities have adopted ordinances. Second, the ordinances adopted by these six cities are all but identical in how they regulate the lending practices of credit access businesses. Key features of all six ordinances include the following provisions:
- A credit access business must apply for and receive a certificate of registration from the city.
- A credit access business must maintain complete records of all loans made by the business for at least three years and make the records available to the city for inspection upon request.
- The amount of a payday loan may not exceed 20 percent of the consumer’s gross monthly income.
- The amount of an auto title loan may not exceed the lesser of three percent of the consumer’s gross annual income or 70 percent of the retail value of the motor vehicle.
- Any loan from a credit access business that provides for repayment in installments may not be payable in more than four installments, and the proceeds from each installment must be used to repay at least 25 percent of the principal amount of the loan. No renewals or refinancing of installment-payment loans are permitted.
- Any loan from a credit access business that provides for a single lump sum repayment may not be refinanced or renewed more than three times, and the proceeds from each refinancing or renewal must be used to repay at least 25 percent of the principal amount of the loan.
- Any loan made to a consumer within seven days of a previous loan has been paid by the consumer constitutes a refinancing or renewal.
Cities contemplating the adoption of an ordinance regulating the lending practices of credit access businesses should consider adopting substantially similar regulations to those adopted by the six cities mentioned above. If Texas cities that wish to regulate in this area continue to adopt essentially uniform ordinances, credit access businesses will not be able to use the argument that city ordinances vary from city-to-city if they seek preemption legislation in 2015.
City officials should be aware that adoption of any ordinance regulating credit access businesses will likely cause stakeholders representing the payday and auto title lending industry to file a lawsuit. To assist cities that may be facing such a lawsuit, TML has created this “payday lending clearinghouse” webpage. This page includes the pleadings in each lawsuit that has been filed. In addition, it includes an example ordinance that consolidates the features of the similar city ordinances, as well as additional information.
Each city should consult with local legal counsel prior to adopting any ordinance. That is particularly true in this instance.