Lending Loophole: Payday Loans Gouge Those Who Can Least Afford It by John Litzler

by John Litzler

A man walks into a church and follows the signs to the church office. It’s a Tuesday afternoon and the church is mostly empty. “Excuse me,” he says, “I need some help with grocery money. Can you help me out?” The church has a benevolent care fund set up for exactly this purpose and they are able to give the man a gift card to a local grocery store and direct him to the community food pantry.

Two Tuesdays later the man is back at the same church with a similar request. This time, though, the church has some questions for the man before he can receive his grocery money. Can we help you find work? Can we help you create a budget? Why are you back exactly two weeks later?

This is how many churches and religious groups first learn about payday lending. In order to receive a payday loan, the lender requires the borrower to write a check posted dated for the borrower’s next payday. The payday lender cashes the check on the borrower’s payday before the borrower can pay bills or other expenses. Now, the borrower doesn’t have enough money for groceries or other necessities and the borrower needs to take out another payday loan so that the borrower has money to live on until his or her next paycheck. The borrower is now caught in a cycle of debt. A Consumer Financial Protection report found that over 80% of these loans are rolled over into another loan within two weeks.

[adning id=”33097″]

Because Texas limits on the amount of interest a lender can charge a borrower this “debt trap” practice hasn’t traditionally been a realistic business model. These types of exorbitant interest rates are considered usury. But in the early 2000s, payday lenders found a loophole. By registering under the Texas Credit Services Organizations Act, a law originally intended to help Texans, payday lenders could charge “fees” associated with obtaining an extension of consumer credit. These “fees” are not capped and are not considered interest when determining compliance with usury laws. This lead to annual percentage rates (APRs) of over 500% and made the payday lending industry incredibly profitable.

According to the Texas Fair Lending Alliance, this loophole has caused the number of credit service organizations (payday lenders) to skyrocket from 250 locations in 2004 to over 3,400 in 2011. There are now more payday lenders in Texas than McDonalds and Whataburger locations combined. The numbers may seem surprising until you consider Sulphur Springs. Sulphur Springs has one Whataburger and one McDonald’s, but there are over a dozen payday lenders inside the city limits.

But Texans are fighting back. They are working to end the predatory lending practices that are exploiting working people, many of whom become desperate when facing financial difficulty. Over 35 cities in Texas have passed ordinances that regulate the payday lending industry. These regulations include requiring the lender to consider the borrower’s ability to pay when deciding on a loan amount, limiting the number of times a loan can be rolled over, and requiring that some of the payments be applied to the loan principal instead of applying the entire payment to interest and fees.

[adning id=”33097″]

The issue of protecting the most vulnerable among us from exploitation is one that crosses the lines of political affiliation. It is also an issue of national security. In 2015, the Department of Defense included a Military Annual Percentage Rate of 36% as part of new regulations under the Military Lending Act. The Department of Defense determined that the excessive debt created by payday lending was so oppressive that it affected military readiness.

Without the 36% cap, civilian borrowers in Texas pay a fee near $23 for every $100 they borrow. For a two-week loan those fees translate to an APR of 574%.

At the Sulphur Springs City Council meeting recently, Dr. Joel Tiemeyer, pastor at The Way Bible Church, spoke to the city council during public forum about the need to regulate this industry. Many Christians feel similarly. The teachings of the Bible are clear about not oppressing others through unfair lending practices. Proverbs 22:22 says, “Do not exploit the poor because they are poor and do not crush the needy in court…” People of all faiths, not just Christians, have begun to take up the cause. Texas Faith for Fair Lending is a group of religious leaders of differing faiths and backgrounds seeking reform through the Texas legislature on a state-wide scale. They share a common belief that while it may be good to give a hungry man grocery money, it is immensely more helpful to stop others from exploiting him.

John Litzler directs the Church Law division of Christian Unity Ministries in San Antonio. He is a graduate of the University of Texas and Baylor Law school. He is a member of the SSHS class of 2004.