1. Rama Gerig, MSWStudent 8/15/16
UniversityofHouston -GCSW
Payday Lending in TEXAS: Predatory
Lending Crises
Whatis Payday Lending? Payday lendingis a small cash advance that
typically ranges from $100 to $1,000; initially it is two-weekloan, whichis
due withfull interest and fees. Lenders use a post-dated checkor electronic
access to a debit/checking accountas collateral. The basic understanding of
the initial loan assumes that a borrower willrepay the loan acquired with
the following paycheck and within the initial time-period. However, in reality payday lenders rely upon
the refinancing (knownas a rollover)of payday loans to repeat borrowers, whichmaximizes profits.1
SocialProblemOverview – Whoarethe targets? Payday lenders are becoming the banking choicefor
those in poor and workingclass areas, resulting in a long-lasting cycleof debt and deteriorating poverty-
stricken communities. Payday lenders target the communities
of poor working class and lower
income families. In line with the
social disorganization theory,
payday lenders tend to target
low-income and chiefly African
American communities2
. In 2014, the average income of a borrower was $32,
614 and the consumer net worth was $22,6163
. The locations of these facilities
make them easily accessible forthe workingpoor, but the convenience is
not really worth the consequences. The unsuspected trap-awaiting
consumers are the rolloverof the loans. This creates an inevitable cycleof
debt forthose that can barely affordthe minimal cost of living. Therefore,
the problem of payday lenders is best defined as an industry where most
are predatory in nature, creating a cycleof debt, and taking advantage of the
poor working class communities as wellas those that are already in
financial crises. The significant costs that customers of these
unconventional banking practices experience have fallen under policy
debates and controversy forsome time.
Payday Lenders arecharacteristically referred toas predatory lenders.
This term is broadly defined by the Federal Deposit Insurance Corporation
(FDIC),4 as “imposing unfair and abusive loan terms” on vulnerable
borrowers. There are excessive fees, rollovers, and in Texas, even criminal
charges used to reinforcethese supposed temporary loans.
In Texas,Payday lenders often5–
o Chargeasmuch as 500% APRfora$500loan.
o Rolloverscanresultinmorethan $1201.54for $500loan.
o Loansare frequently made“backto back”with no limits.
“Low-income, chiefly African
American communities, with an
average income of $32,614 and a net
worth of $22,616”

2. 2
o 75% ofloansareless than 2-weeksapartwith no coolingoff period
o Morethan 1,576criminal complaints madeagainstTexasborrowers.6
o At Least 6 people havebeenjailedfornon-payment.
o Therearemore than 3000lendersinTexas.
Figure1 ShowsDebtTrap that can resultfromPredatoryLending7
The impactofpaydaylenders (predatory lending) on the vulnerable is reinforcing income disparities
and inequalities amongst the poor. Texas families are more vulnerable to financial hardship by the
high repetitive fees and defectiveloan structure. This cycleof debt consistently adds more pressure to
the borrower and increase the likelihood of becoming dependent on renewing the loan, whichmeans
remaining trapped. A concentration of payday businesses in lower-incomecommunities discourages
other types of economic development8. Even more importantly, is to ensure that rather than simply
removing these industries, policy makers needs to replace the brokenness that allows the lenders to
find loopholes and prey on the vulnerable
Underthe currentPolicy SB 1251,AnAct, Chapter342 SubchapterFofthe Texas FinanceCode
(342 F)Payday,lenders havefound a loophole9 . In 2001, the Texas Legislature passed a law,
Chapter 342 F, whichessentially put a cap on the amount of interest rates and fees forpayday lenders.
However,by claiming themselves as a “Credit Services Organizations” (CSOs), payday lenders manage
to avoid complying withstate lending laws. In effect,they finagled a loophole,and are able to continue
charging excessive fees to broker and guarantee installment loans, as opposed actually making
loans. Under, the 2011 legislation, a Credit Services Organization (CSO) is now called "Credit Access
Business" (CAB). As demonstrated in the chart below,borrowers often pay even more in fees, because
of this loophole. In 2014, those that refinanced a payday installment loan are susceptible to paying as
much as $3,000 for a $500 loan10.
Figure 2 This is based onvarious products onthemarket inTexas, comparingthosethatoperate
underChapter342 Fwith paydaylenders. It is clear thatunder the guiseof CAB, payday loans
are morethan 70 times higherthanthose under342 F 11.

3. 3
Policy Recommendations – Deferred PresentmentAct Fl. Stat. Ann.§§ 560.402 etseq.; Rules 69V-
560.707,69V-560.901-912. . When it comes to understanding a social problem, one must consider
all viewpoints. Evidence indicates that many consumers see payday lenders as a beneficial option to
alternative banking, and this is supported by the growthof the industry, whichcan be a source of
strength to the community,if properly mandated. Therefore, a compromise is necessary, wherein
both parties’ needs are met. Florida’s DeferredPresentmentAct is a healthy compromise for the
consumer and the businesses.
UnderFlorida Law12:
 There is a mandatory 24-hour cooling off period between loans.
 Loan terms are limited to no less than 7 days and no more than 31.
 Rollovers are not permitted.
 The Law provides a grace-period for borrowers in default to repay the loan –
o To receivethe grace period the borrower must attend credit counseling.
o Training/counseling must be completed within 60 days.
 There is a limit of no more than a 10% fee charge on loan amount.
 Verification fees and additional charges are limited to $5.00 per loan.
The Florida policy procedures have a 14-year proven record; the default rate has declined from 40%
to less than 5% under these guidelines13. Currently, the Consumer Financial ProtectionBureau (CFPB)
is in the process of making harsher regulations that may in fact put overly strict regulations on payday
lenders. This wouldforce many consumers to find other means, some illegal – others impossible.
Thus, payday lending is worthy of policy attention that willsafeguard the underserved fromthe
predatory nature of these loans.
1 Wherry, F. (2015, October 29, 2015). Payday loans cost the poor billions, and there’s an easy fix, Op-Ed Contributor. The New York
Times. Retrieved from http://nyti.ms/1kUQuNA
2 Lim, Y., Bickham, T., Broussard, J., Dinecola, C. M., Gregory, A., & Weber, B. E. (2014). Therole of middle-class status in payday
loan borrowing: A multivariate approach. National Association of Social Work, 59.
3 Boyajian, S. J.(2011).Why payday loans are just awful. Providence Journal, p. 7. Retrieved from
http://www.lexisnexis.com.ezproxy.lib.uh.edu/hottopics/lnacademic/?
4
Peterson, A. (2013). Predatory payday lending its effects and how to stop it. Center For American Progress, 1-7.
5 Raise Texas. High cost of small dollar lending in Texas. Building Financial Success. Retrieved from
https://raisetexas.org/policy/high_cost_of_small_dollar_lending_in_texas/
6 Walsh, B. (2015,December 29).Texas is throwing people in jail for failing to pay back predatory loans. Huffington
Post Retrieved from
http://www.huffingtonpost.com/2014/12/29/texas-payday-lending_n_6355602.html
7 Texas Fair Lending Alliance. The problems. TFLA. Retrieved from http://www.texasfairlending.org/the-issue/the-problems/
8 Raise Texas. High cost of small dollar lending in Texas. Building Financial Success. Retrieved from
https://raisetexas.org/policy/high_cost_of_small_dollar_lending_in_texas/
9 An Act, HB 1626,House Research Organization (2015).from
http://www.legis.state.tx.us/tlodocs/84R/billtext/html/HB01626I.htm
10 Garemko III, M. A. (2012).Texas's newpayday lending regulations: Effective debiasing entails more than the right
message. Texas Journal on Civil Liberties & Civil Rights, 17(2), 211-249.
11 Texas Fair Lending Alliance. The problems. TFLA. Retrieved from http://www.texasfairlending.org/the-issue/the-problems/
12 Morton, H. (2015).Payday lending state statutes. National Conference of State Legislatures Retrieved February 12,
2016, from http://www.ncsl.org/research/financial-services-and-commerce/payday-lending-state-statutes.aspx
13 Riddell, K. (2015,July 21).Florida fights government regulation of payday loans, pushes own law as nationalmodel.
Washington Times. Retrieved from http://www.washingtontimes.com/news/2015/jul/21/florida-fights-payday-loan-
government-regulation-p/?page=all