The push to regulate payday lenders is expanding to the city of Houston, where officials have agreed to join the growing list of Texas cities to approve new regulations on the industry. The recently passed ordinance mirrors laws adopted already in Austin, Dallas, El Paso, San Antonio and other small cities in the state.
The new rules will take effect July 1 and will require payday lenders, along with auto title businesses, to register with the city. The rules will limit how much a person can borrow and how many times a loan can be renewed.
Under current Texas law, there is no limit to the fees that payday lenders and auto title businesses can charge and no limit on the number of times they can charge high-fees for essentially the same loan. A fast cash payday advance of $500 that is rolled over five or more times, for example, could wind up costing $1,200 or more.
The new law in Houston regulates these issues by:
Requiring payday loan and auto title loan businesses to register with the city annually;
Limiting payday loans to 20 percent of the borrowers gross monthly income;
Limiting auto title loans to 3 percent of the borrowers gross annual income or 70 percent of the vehicle value, whichever is less;
Limiting single payment loans to no more than three refinances or rollovers and installment loans to no more than four installments;
Requiring each installment, refinance, or rollover payment to reduce the total principal owed by at least 25 percent;
Defining a rollover or renewal as a loan within seven days of the previous loan;
Requiring loan agreements to be written in easy-to-understand language;
Requiring contact information for non-profits offering financial literacy and cash assistance.
A community-wide coalition of non-profit agencies had been rallying for passage of the ordinance. According to the Houston Fair Lending Coalition, nearly one-third of non-profit clients seeking financial assistance in 2012 were in trouble on payday or auto title loans. Loan rollovers accounted for 76 percent of all payday loan volume, the coalition said.
Houston Mayor Annise Parker said she had initially favored a city-specific measure, but decided that joining with other Texas cities in a "united front on this issue is the best way to send a strong message to the Texas Legislature. Lenders deserve to make a profit on their investments, but not by charging astronomical interest rates to desperate consumers who have nowhere else to turn for emergency financial assistance. The statewide model I am recommending for approval by Houston City Council achieves this balance.
The initial term for most payday loans is two weeks to one month, with the term usually determined based on the borrowers pay cycle. A borrower who fails to make a payment on an auto title loan could wind up losing his means to get to work and take his children to school.