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League of Women Voters Releases Payday Lending Study
Monday, August 24, 2015 6:35 AM

Recently the League of Women Voters of Texas released a study on payday and auto title lending in Texas. In 2000, the Texas Office of Consumer Credit Commissioner adopted rules to ensure that payday lenders would abide by state law that capped interest rates and administrative fees on cash advances at varying levels according to the size and duration of the loan. The majority of Texas payday lending companies soon partnered with out-of-state banks not subject to these restrictions.

This practice was eliminated in 2005 when the Federal Deposit Insurance Corporation issued restrictions on the use of third-party banks in payday lending transactions. However, opinions by the Court of Appeals for the 5th District of Texas (2004) and the Office of the Attorney General of Texas (2006) have permitted payday and title loan businesses to operate as “credit services organizations.” Credit services organizations have no restrictions on administrative fees for arranging loans.

In 2013, two-thirds of Texans who had ever used a payday loan were younger than 45, while the majority of those who had ever used an auto title loan were 45 and older. Two-thirds of borrowers lived in metropolitan areas. African American and Hispanic Texans used payday (70 percent) and auto title (62 percent) loans at rates disproportionately high compared to their share of the state's population (51 percent). One third of all payday and auto title loan borrowers had obtained some college education. Half lived in households with annual incomes between $15,000 and $50,000, and two-thirds were employed. One in six payday and title loan borrowers in Texas was disabled.

Interviews revealed that payday and auto title loan consumers use small-dollar loans to overcome financial shortfalls whenever money is tight for basic living expenses, unexpected or emergency events, and special occasions. They choose payday and title loans because these loans are easy to apply and qualify for, accessible at any time, available nearby, and their lenders are friendly in comparison to mainstream lenders. Borrowers believe a payday or title loan to be the best alternative to the disruption and financial penalties for shutoff utilities or bounced checks.

Interviews found that payday and title loan consumers are overwhelmingly satisfied with their loan experience, primarily because of the convenience of obtaining the loan. A majority of payday loan borrowers favored no limitation on the number of loans they can get per year. Most auto title loan borrowers reported that the terms of the loan were clear. Without the loans, most payday and title loan borrowers would cut back on basic expenses, delay paying bills, borrow from family or friends, and/or sell or pawn personal possessions.

In August 2014, the Texas Office of Consumer Credit Commissioner reported that 207 companies were licensed as credit access businesses in Texas, operating 3,296 storefronts in 2,232 cities and towns. Over half operated only one storefront. The 2012-2014 3-year average in number of storefronts was 3,510. Payday and auto title lenders tend to cluster around major metropolitan areas, military installations, and veterans facilities.

According to the Texas Office of Consumer Credit Commissioner, 1.7 million borrowers in Texas took out over 2.7 million new payday and auto title loans in 2014. While the number of borrowers decreased by 11 percent from 2013 to 2014, the number of loans decreased only 9 percent. Payday loans outnumbered title loans by over 7 to 1. Single payment loans outnumbered installment loans 2 to 1. Nearly half (45 percent) of all loans were refinanced at least once. Among refinanced loans, 70 percent were ultimately refinanced more than once, usually two to four times.

Texas does not track payday or title loan default rates. But according to the Texas Office of Consumer Credit Commissioner, 44,052 (11 percent) vehicles were repossessed from Texas auto title loan consumers in 2014—an average of 125 vehicles per day.

Regarding default on payday loans in Texas, Skiba and Tobacman (2008) found that 12 percent of borrowers defaulted on the initial loan. Within one year of refinancing their initial loan, 51 percent had defaulted. This study had tracked over 51,600 bi-weekly paid workers for one year who had taken out nearly 335,400 payday loans from one Texas outlet during 2000-2004.

The League of Women Voters of Texas estimates that while the payday and auto title lending industry added nearly $13.3 billion in value to the United States economy in 2012, the loss of $15.2 billion in consumer household economic activity resulted in a net loss of over $1.8 billion in economic value.

In addition, the industry generated an estimated 152,931 jobs in 2012. However, had payday and title loan consumers spent or saved their loan fees, an estimated 192,631 jobs would have been generated. Thus, the economic impact of the payday/title loan industry on jobs was an estimated net loss of 39,442 jobs nationally.

The League of Women Voters of Texas worked to determine if payday and auto title loans ultimately help or harm consumers. They concluded that research findings are mixed, reaching opposing conclusions. All of the studies reviewed to date have design flaws that reduce the believability of their results and limit confidence in their conclusions.

Source:  League of Women Voters of Texas, 20 August 2015