Home  / Policy

High Cost of Small Dollar Lending in Texas

Explanations of payday and auto title loans

• A payday loan is a small cash advance—usually ranging from $100 to $1,000—due in full plus interest and fees, in two weeks, with a post-dated check or electronic access to a debit account as collateral.
• An auto title loan is similar except that a car title is used as collateral. These loans are due in full, plus interest and fees, at the end of a short term, typically one-month. If the borrower cannot pay the full amount at the end of a month, the loan company can take the car.

Reason that Texas payday and auto title lenders can charge the unprecedented fees

• In 2001, the Texas Legislature passed a law that effectively capped interest rates and fees for payday loans. To avoid complying with state lending laws, payday and auto title lenders have exploited a loophole, where they claim to be “Credit Services Organizations” (CSOs). Instead of making loans, they get around the law by charging excessive fees to broker and guarantee loans.
• Payday and auto title lenders in Texas often charge upwards of 500% APR for an average $300 loan. This translates to a payday borrower in Texas will pay $840 for a $300 loan.
• 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 fact, more than 75% of payday loans are taken out within 2 weeks of the previous loan in order to fill the financial gap caused by the loan itself. This is how the loans catch a borrower in a cycle of debt.
• Current number of predatory lenders in our state: 3,594.
• Concentrations of payday/auto title locations stunt property value appreciation and give neighborhoods a look of economic decline.

Solutions

• Financial literacy
• Alternative short-term financial products
• Meaningful market regulation

RAISE Texas is committed to supporting legislation that will close the CSO loophole and will hold all payday and auto title lenders accountable for their rates and fees. In order to have success in the legislature, it is going to take the entire RAISE Texas network and more to discuss this problem with elected officials on all levels. Stay informed of the policy agenda to stop the high cost of lending in Texas by visiting this page frequently, or by signing up to be a part of the Alternative Small Dollar Consumer Loans Products and Policies Campaign.

Results from the 81st Legislature Regular Session in 2009

In the last legislative session in 2009, thirteen bills were drafted and filed around fair lending practices in Texas. Of the thirteen bills filed, 8 of them specifically dealt with closing the CSO loophole (mentioned above). Below is a list of the bills that were proposed but did NOT PASS the legislature.

• HB 3744 filed by Representative Marisa Marquez establishes regulations for credit services organizations (CSOs).
• HB 3304 filed by Representative Carol Kent to regulate credit services organizations.
• HB 3772 filed by Representative Joe Farias would require that a credit services organization shall register with the Office of the Consumer Credit Commissioner before conducting business in Texas.
• HB 4312 filed by Representative Pete Gallego to provide general basic consumer protections for transactions in this state.
• HB 4391 filed by Representative Joe Farias requiring a credit services organization to register with the secretary of state before conducting business in Texas.
• HB 2211 filed by Representative Tom Craddick restricts the services provided by credit services organizations (CSOs) for motor vehicle titles and check cashing.
• SB 248 filed by Senator Eliot Shapleigh caps interest rates at 36% for small dollar consumer loans.
• SB 243 filed by Senator Eliot Shapleigh prohibits Credit Service Organizations (CSOs) from lending.