Payday, auto title lending ordinance takes effect Wednesday

untitledEmergency cash is needed for a variety of reasons — cars break down, children get sick or injured, and sometimes jobs are lost.

In 2013, 4,557 people in the College Station-Bryan Metropolitan Statistical Area visited a Credit Access Business (CAB) and used payday and auto title loans to meet their need for emergency funds. They borrowed $6 million and paid $4 million in fees, according to the Texas Office of Consumer Credit Commissioner.

Payday loans are small cash advances with two-week terms — with interest and fees applied. Payday and auto title loans offered by CABs are made by non-affiliated third-party lenders with the CAB acting as a loan broker guaranteeing the loan. Profit is derived from fees charged for their services. In 2013, the average amount Texans borrowed per loan was $463.

For auto title loans, a car title is used as collateral. If the borrower defaults, the lender can take the car. Borrowers usually have a one-month loan term with interest and fees applied. In 2013, the average amount borrowed was $1,239.

What’s the problem?

One of the main problems with these loans is that the principal is not reduced if the loan is not 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 will owe about $610 dollars two weeks later. If the borrower can’t pay back the full amount, they must pay $110 to refinance the loan. After two more weeks, if the borrower again can’t pay back the full amount, they must pay another $110 to refinance the loan again. With no partial repayments of principal, the balance never goes down.

CAB Ordinance

Thanks to the Credit Access Business Ordinance that takes effect Wednesday, credit access businesses must now register with the City of College Station. In addition to client disclosure and record keeping requirements, the ordinance sets the maximum amount of a loan and restricts how many 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 by the business 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 three 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 loan’s 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 loan’s principal. Any loan made to a consumer within seven days of a previous loan being paid by the consumer constitutes a refinancing or renewal.

For more information about local financial education and empowerment resources, dial 211 for 2-1-1 Texas.

Photo Credit: HelenCobain via Compfight cc
David Brower