Social Justice: Now is time to urge legislators to pass fair-lending laws
By Barbara Budde
While we have not yet elected the officials who will lead the next legislative session, there is unfinished business from the last session. Our Catholic bishops advocated for several issues that the new leaders must address. One such issue is regulating payday and auto-title loan businesses.
Here is the situation: there are people who run into financial difficulty but they do not have access to emergency money. They are not part of a credit union or can’t qualify for a traditional bank loan; they don’t have good credit; they don’t have much collateral. These people are not hard to find: they are our hard-working neighbors who are living on the financial edge. Sickness for them or a family member, an accident or something as common as a car breakdown can cause enough financial disruption that suddenly they are unable to pay the rent or utility bill. In their desperation, they turn to help in the form of a loan against their next paycheck or a loan against their car at the local payday or title loan store.
It is quick and easy and they have the money they need when they need it and the loan can be paid back quickly with the next paycheck.
That is where the happiness ends and the story takes a tragic turn. Our neighbor who just needed a few hundred or maybe a thousand dollars to get passed an emergency is now caught in the loan cycle.
With this type of loan, one must pay back the full amount with interest and fees within the repayment period, which is typically two weeks or one month. For our brothers and sisters with no financial cushion this is often impossible. Every penny of every paycheck is already allotted to necessary expenses so how can the loan be repaid? “No problem,” says the friendly staff at the corner loan shop, “pay the interest and fees and we can roll the rest into another loan.” However, in this scenario the principal amount of the loan remains untouched. Every month or every two weeks the borrower faces interest and fees that they cannot afford.
Many lenders will argue that these loans are risky; therefore, the fees are high. With the rollover fees added to the mix, the effective interest rate some will pay for an emergency loan is 400 to 700 percent APR. Furthermore, clients with multiple rollovers, as is typically the case, pay $900 in fees for a $300 loan. Thus the storefront has made $900 in profit from fees and the client still owes the principle amount of $300. That is not mitigating risk, it is usury.
The Texas bishops called on our state legislators to regulate this loan industry so that anyone living on the financial edge would be able to get loans, but would also be able to repay them without incurring endless rollover fees. The legislation proposed by the bishops has been enacted in other states and the payday or title lenders have not left those states or lost business. They are making enough money for their business model to work profitably.
In response to the failure of the legislature to act, cities around Texas, including Austin have passed local regulations, which place limits on this industry. What we have learned is that once the rollover fee limit is reached, the company often transfers the loan to a branch outside the city so that store can now continue to charge the rollover fees. The local answer is helpful for a while, but without every surrounding community passing similar regulations, the poor are still vulnerable to exploitive fees. That is why we need a state solution. That is why as the campaigning continues, it becomes important to ask candidates whether they support statewide regulation that will allow this industry to operate but with limits that will protect the poor and vulnerable from exploitation.
Don’t wait for the election to take action. Call on those running for office to commit to passing the kind of legislation our bishops have proposed. The poor and vulnerable are being exploited and we can help them. Find educational information on this issue at www.txcatholic-fairlending.org.
Barbara Budde is the diocesan director of social concerns. She can be reached at (512) 949-2471 or firstname.lastname@example.org.