To make matters worse, your last emergency left your bank account dry. You also realize that without a car, you’ll have a hard time getting to work and dropping the kids off at daycare in the morning.
And payday is a week away.
Under this scenario, a payday or auto title loan might be the only option for getting the emergency cash you need. This and similar circumstances create problems for many Texas families because the state does not regulate the terms or conditions of loans from credit access businesses.
City council passes ordinance
On Thursday, College Station joined several other Texas cities across the state, including the City of Bryan, when the city council passed an ordinance regulating credit access businesses, better known as payday and auto title lenders. To allow time for these businesses to comply, the ordinance won’t go into effect until late August.
According to the Pew Charitable Trust, Texans pay more than citizens of any other state for access to the same loan products: “The same $500 storefront loan would generally cost about $55 in Florida, $75 in Nebraska, $87.50 in Alabama, and $100 in Texas, even if it was provided by the same national company in all those states.”
One of the main problems for these types of loans is that there is no principal reduction if the loan isn’t paid in full at the end of the short term. High fees are often paid month after month without reducing the loan amount, effectively trapping the borrower in a cycle of debt.
For example, if someone takes out a $500 loan, they’ll owe about $610 dollars two weeks later. If the borrower can’t repay the full amount, they must pay $110 to “refinance” the loan. After two more weeks, if the borrower again can’t repay the full amount, they must pay another $110. The balance never goes down because there are no partial repayments of principal.
The Texas Office of Consumer Credit Commissioner reports that 31,953 payday and auto title loan transactions were made in the College Station-Bryan area in 2012. Local borrowers paid about $2.4 million in fees, and 269 vehicles were repossessed. The average number of refinances was 2.4 times for payday loans and 1.4 times for auto title loans.
What does the ordinance do?
Under the new ordinance, credit access businesses must be licensed and certified by the City of College Station. In addition to client disclosure and record keeping requirements, the ordinance sets the maximum loan amount and restricts the number of times a loan can be refinanced. Here are the ordinance’s key terms:
- A credit access business must apply for and receive a certificate of registration from the city.
- A credit access business must maintain complete records of all loans made for at least three years and make the records available to the city for inspection upon request.
- The amount of a payday loan may not exceed 20 percent of the borrower’s gross monthly income.
- The amount of an auto title loan may not exceed the lesser of 3 percent of the borrower’s gross annual income or 70 percent of the retail value of the motor vehicle.
- Any loan from a credit access business that provides for repayment in installments may not be payable in more than four installments, and the proceeds from each installment must be used to repay at least 25 percent of the principal. No renewals or refinancing of installment-payment loans are permitted.
- Any loan from a credit access business that provides for a single lump sum repayment may not be refinanced or renewed more than three times, and the proceeds from each refinancing or renewal must be used to repay at least 25 percent of the principal. Any loan made to a consumer within seven days of a previous loan being paid by the consumer constitutes a refinancing or renewal.
The city will continue to partner with local financial groups and nonprofit organizations to improve financial literacy and independence. For more information about local financial education and empowerment resources, dial 211 for 2-1-1 Texas.
And you might want to check your tires.