PAYDAY LOANS PRESENTATION
At Tuesday’s work session, the Fort Worth City Council received an overview of issues related to payday and auto title lending. Issues were outlined and the Texas Municipal Leagues model ordinance was discussed during a presentation from Planning and Development Director Randle Harwood and Melinda Ramos from the city attorney’s office.
A payday loan, sometimes called a “cash advance” or “check loan,” is a short-term loan, generally for $500 or less, that is typically due on the borrower’s next payday. A fixed fee is paid to borrow the money, even if it is for a week or two.
An example of fees range from $10 to $30 for every $100 borrowed, depending on the lender. There is no limit on the fees that can be charged in Texas.
If the loan is renewed or rolled over, the borrower will be charged another fee and still owe the entire original amount.
Payday loans are typically used by approximately 12 million Americans annually. On average, a borrower takes out eight loans of $375 each per year and spends $520 on
interest. Of these, 75% of borrowers use storefront lenders and almost 25% borrow online.
The majority of payday loan borrowers are white, female and 25 to 44 years old. Pew Charitable Trust identified five groups that have a higher likelihood of using payday
loans:
*Those without a four-year college degree.
*Home renters.
*African Americans.
*Those earning less than $40,000 per year.
*Those who are separated or divorced.
“This type of business is predatory to the most vulnerable of our citizens,” District 7 Councilman and Mayor Pro Tem Dennis Shingleton said. “We’ve got to find a way to regulate, educate and service those vulnerable individuals.”
The vast majority (69%) of those taking out payday loans do so because of recurring expenses, such as utilities, credit card bills, rent or mortgage payments, and even food. The second largest group (16%) do so for an unexpected emergency, such as car repair or emergency medical expense.
Ironically, when payday loans aren’t available, it doesn’t mean an increase in online borrowing. Research by Pew Charitable Trust found that the rate of online borrowers in states that banned payday lending is only slightly higher (1.58%). Overall, when storefront payday loans are unavailable, only five out of 100 choose to try for an online loan.
Choosing another option with a formal financial institution is not common practice. Also, 81 percent of payday loan borrowers surveyed in other states said their first
choice was to cut back on expenses.
Currently, 27 states (including Texas) allow single-repayment loans with an annual percentage rate of 391% or higher. Nine states have payday loan storefronts but maintain more exacting requirements, such as lower limits on fees or loan usage, and longer repayment periods. And 14 states, along with the District of Columbia have no payday loan storefronts.
There are two approaches of regulation for municipalities, the presentation noted:
*Business regulations: Cities are not expressly prohibited from adopting ordinances regulating the credit access or fees charged.
*Land use/zoning regulations.
Over 40 Texas cities have adopted business regulations similar to the Texas Municipal League Model Ordinance and 16 regulate through land use/zoning. Six cities use both land use/zoning and business regulations.
The TML Model Ordinance includes:
*Require registration with the city and annual renewal.
*Limit the loan amount: Based on the borrower’s gross monthly income, usually not to exceed 20%. Auto title loan amount based on borrower’s gross annual income (3%) or total retail value of auto (70%).
*Limit the number of installment payments to four with a requirement that proceeds be paid to at least 25% of principal of loan.
*Limit the number of renewal or refinancing of single lump sum at least 25% of the principal amount of the loan and requirement that proceeds be paid to at least
25% of principal of loan.
*Loans made to a consumer within seven days of a previous loan has been paid by the consumer constitutes a refinancing or renewal.
*Require maintenance of records for three years and make available for city
inspection.
*Requirement of Consumer Understanding of Agreement for every agreement, refinancing and renewal.
*Must be provided in language of preference of consumer.
*If consumer cannot read, agreement is to be read to consumer.
*Referral to consumer credit counseling.
*Form providing information on non-profit agencies that provide financial
education and training programs and agencies with cash assistance programs.
Common zoning regulations include:
*Definition of the use (credit access business) payday and auto title lending.
*Restriction to certain zoning districts.
*Requirement of special use permit or conditional use permit.
*Distance restrictions from other payday lenders, highways, residential uses.
Long-term strategies to deal with the problem include education, a community loan pool, small banks and credit unions, bank alternatives, and the TML Model Ordinance.
“We have an opportunity to do something and we should be moving forward,” District 8 Councilwoman Kelly Allen Gray said. “Let’s help people who are hurting.”
Gray also noted that Christmas is coming, a time when folks hard up for money, most notably single mothers, often visit these establishments.
“Payday lenders become their best friends at Christmas and back-to-school time,” she said. “Let’s use both of those things we have in our tool box and make it work.”