ouston’s stringent new rules on payday and auto title lenders took effect Tuesday, reviving industry complaints that it would drive companies out of business, or at least out of the city, but giving borrowers a clearer path out of debt.
“We’ll see stores close, we’ll see people laid off,” said Rob Norcross, of Consumer Service Alliance of Texas, a loan industry group. “You’ll have some companies that will maintain stores at lower revenue levels, and they’ll probably close other ones. We’ve only seen a couple companies close up shop totally in the other large metropolitan areas. It will be a gradual process.”
He predicted borrowers whose needs exceed the city’s new limits will go to lenders in unregulated areas, get a loan online or take out several small loans to add up to the amount they want.
Payday lending involves small, short-term loans that avoid legal caps on fees and interest that apply to such mainstream lenders as banks. Title loans operate similarly and are secured by the borrower’s automobile title, leaving the vehicle at risk for repossession. Borrowers typically lack the funds or credit to get loans any other way.
In the 10-county Houston region, home to a fourth of the state’s 3,240 such lenders, data show borrowers refinance more and pay on time less than state averages and that more than 100 title borrowers have their cars repossessed each week.
Houston’s ordinance limits payday loans to 20 percent of a borrower’s gross monthly income and auto title loans to 3 percent of the borrower’s gross annual income or 70 percent of the car’s value, whichever is less. Single-payment payday loans can be refinanced no more than three times, while installment loans can include no more than four payments. The principal owed must drop by at least 25 percent with each installment or refinancing.
Houstonian Angela Johnson, stopping by the Northline Ace Cash Express at Crosstimbers and the North Freeway to cash a check Tuesday, said she has used payday and auto title loans at Christmas time to buy gifts. Businesses ought to be able to lend people what they ask for, she said.
“On $200, it’s $260 you have to pay back. That’s a lot. If you didn’t have the $200, what makes you think you’re going to keep having the extra $60?” she said, chuckling. “It’s kind of ridiculous. But it helps people out.”
Employees of several Northline Mall-area lenders, prevented by company policies from giving their names, said the impact of the ordinance was clear Tuesday. A worker at one lender said some customers were upset at not being able to borrow as much as they wanted, but staff at title lenders said clients were happy with the new rules, saying the principal-reduction clauses gave them a clear path out of debt.
The City Council passed Houston’s new rules last December, aiming to curtail what Mayor Annise Parker called a usurious racket that traps borrowers in a cycle of debt.
The new regulations are modeled on strict ordinances passed by Dallas, Austin, San Antonio and El Paso. At the time, Parker said Texas cities must send a consistent message to state lawmakers, who have failed to enact stronger payday and title loan regulations in each of the last two legislative sessions.
On the first day of enforcement, city officials had identified 361 active payday and auto title lenders inside Houston’s city limits, 309 of which had registered under the new rules as of Tuesday morning.
Toya Ramirez, a staff analyst in the city’s Administration & Regulatory Affairs department hired to oversee the ordinance, said it was unclear which of the remaining 52 lenders have closed, moved outside city limits or simply failed to register.
Ramirez said the city will approach enforcement using a complaint-based system, and said there are no stings or compliance audits planned.
That contrasts with statements from City Attorney David Feldman as council prepared to pass the rules last December. Feldman said Houston would have a plan to enforce the ordinance up front, saying, “It’s obviously something that requires not just manpower, but skilled manpower.” The city estimated it would need to add four staff to ensure each lender was audited once every three years.
Houston hired only Ramirez, however.
Asked about enforcement on Tuesday, Feldman said the meaningful way to combat predatory lending is at the state, not local, level, and said many thought federal rules would have trumped the entire discussion by now.
Brett Merfish, of Texas Appleseed, an Austin-based advocacy group that helped push for the ordinance, said complaints have brought violations of the ordinance to light in other cities.
“Cities have also started with complaint-based systems and then moved to other types,” she said.
In Austin, regulator Martha Hernandez said few complaints are coming in, but that some have led to court cases, including one set for Wednesday in which a customer allegedly was offered a loan that violated the ordinance. Two other Austin cases have been filed against lenders for not registering with the city, both of which resulted in fines.
In San Antonio, officials in May said they would prosecute seven lenders, three for allegedly doing business without registering with the city and four for allegedly refusing to let the city to inspect their business records.
In Dallas, assistant city attorney Maureen Milligan said city officials have conducted 72 code inspections and six financial audits, issued four citations to a payday lender in a case headed to court this month, and issued 34 other citations. In response to violation notices, she said, Cash America pawn shops have stopped offering payday loans at 13 locations.