Debtors' Treadmill, Part Two: Political Payday

Killeen retiree Preston White is readying for battle against the payday loan industry in Texas after a lender charged him sky-high fees and threatened to take his truck. “We have committed ourselves to trying to fight this,” White said.

He’d better start loading his war chest with cash.

Companies that offer short-term consumer loans and want to avoid state regulation gave Texas officials more than $1.4 million in campaign contributions over the past nine years, Texas Ethics Commission records show. And critics of the lending practices argue the industry got what it paid for when it comes to regulation: nothing.

“Companies that are benefiting are paying ... to assure that they can continue to basically rape and pillage the finances of a very vulnerable group of people,” said state Sen. Wendy Davis, D-Fort Worth.

Credit service organizations, also called payday lenders, offer short-term, high-cost loans, primarily to low-income Texans, and are subject to virtually no state regulation. Since 2005, lawmakers like Davis and state Sen. Eliot Shapleigh, D-El Paso, working alongside advocates for the poor, have pushed for changes in state law to limit the interest and fees the companies charge, which often exceed 500 percent and lock families into a cycle of debt.

Lawmakers who receive thousands of dollars from payday lenders and their political action committees have blocked the measures again and again.

The lenders argue they offer a product that consumers with little or no credit can’t get elsewhere. Rob Norcross, spokesman for the payday loan industry group Consumer Services Alliance of Texas, said the Federal Trade Commission and Texas statutes prohibiting deceptive practices already regulate the companies. Still, he said, the companies are open to discussion about additional oversight.  “I think that is something everybody is going to continue to talk about and work toward,” he said.

Until 2005, the state Office of Consumer Credit Commissioner regulated payday loans. That year, short-term lenders started using a new business model, registering as credit service organizations to avoid state usury laws. So-called CSOs are not licensed or regulated by the state. They are only required to pay a $100 fee to register annually with the Texas Secretary of State. More than 3,500 businesses are registered as CSOs, according to the Secretary of State.

CSOs cannot lend money directly to consumers. They use third-party brokers, and avoid laws that prevent exorbitant interest rates by instead charging huge service fees.

In Preston White’s case, he used his 2003 Chevy Avalanche as collateral on a $4,000 loan for his daughter, a U.S. Army veteran who needed quick help to relocate after returning from a tour of duty in Iraq. He quickly realized he could pay $1,300 a month in fees and interest for months to come and never repay the debt. To no avail, he looked for assistance from the Texas attorney general and the OCCC. He eventually found help and escaped the debt, but he said the experience convinced him the law needs to be changed to protect others who have nowhere to turn. “They’re really unregulated in terms of what they can charge, and I can’t understand that,” he said.

White’s not the only one. In 2009, Sens. Davis and Shapleigh filed a slew of bills that attempted to bring oversight to credit service organizations and put limits on the amount of interest the companies can charge. “The problem is there is no recourse” for consumers, Davis said. “What’s happening to them is perfectly legal.”

The bills were directed to the Senate Business and Commerce Industry Committee. State Sen. Troy Fraser, R-Horseshoe Bay, held the first public hearing on the bills on May 5, just days before the end of the legislative session. At that late date, the bills had no chance to pass.

High-powered lobbyists for the lenders filled the audience at the hearing, among them former Texas House Speaker Gib Lewis. He represents Cottonwood Financial, which owns The Cash Store — the company that loaned money to Preston White. The former speaker has lobby contracts with payday lenders and others worth up to $785,000 this year. Lewis registered a position against the bill but did not testify at the hearing.

Scott Sheehan, a lawyer and representative of the payday lender group Consumer Services Alliance of Texas, did testify. He told Fraser and the rest of the committee that capping interest rates and requiring more oversight would put the companies out of business. “These are not predatory loan products,” he said. “These customers routinely evaluate choices they have in the Texas marketplace.”

Chairman Fraser left the bills pending. His committee never held a vote on the proposals.

Fraser was one of more than 100 lawmakers and elected state officials who since 2000 received contributions from the payday lending industry. The Tribune analyzed state campaign donations made since 2000 by companies that offer short-term loans and their political action committees. Together payday loan interests gave at least $620,000, with the average donation at just under $1,000. The top recipient was Gov. Rick Perry, who got about $65,000.

Fraser, whose Senate district includes Preston White’s Killeen home, was among the top 10 recipients of payday loan money. He got $13,000. Fraser did not return phone calls and e-mails seeking comment for this story.

But the industry isn’t only invested in the Legislature. Texas Attorney General Greg Abbott, who has not taken action to stop payday lenders, received $36,500 from the industry. And William White, the chairman of the Texas Finance Commission, which governs the OCCC — the agency that would be charged with oversight of payday lenders — spent 25 years as a senior executive at Cash America. The company has 259 payday lending locations in Texas.

Abbott spokesman Jerry Strickland said the attorney general has not prosecuted payday lenders because legislators haven’t given him that authority. “The Office of the Attorney General has neither the authority to pass new laws, nor the ability to impose new statutory regulations,” he said. Gary Meissner, manager of consumer assistance at the OCCC, said that agency also is at the mercy of legislators, who have given them no power to regulate short-term lenders.
 
Another lender group, the Texas Consumer Finance Association, gave lawmakers $830,000. The association represents regulated short-term lenders, not credit service organizations, but it opposes caps on interest rates.

Without legislation to clamp down on interest rates and provide oversight of credit service organizations, thousands of Texans who are less fortunate than Preston White end up trapped in a cycle of debt. Lenders make millions off the interest and fees that stack up as consumers, unable to keep up with mounting charges, continually renew the loans and fall deeper in debt. “The debt trap is just incredible,” said Tim Morstad, associate director of AARP Texas. “These loans are really set up for people not to be able to repay them in the short-term.”

Other states, including Georgia, North Carolina and Pennsylvania regulate payday loans, and Arkansas Attorney General Dustin McDaniel last year ordered the companies to stop making loans in that state.

When it comes to Texas payday lenders, Sen. Davis said she will continue filing her bills, but she is not hopeful for change anytime soon. The human cry from consumers like Preston White, she said, is drowned out by the money and clout of the lenders. “The lobby that works on behalf of the industry is powerful and widespread.”