Texas statehouse hearing testimony on payday lending regulations

Check cashing services are often grouped with payday lenders, but they're not the same thing. Image: Flickr / livenature / CC-BY-SA

The Texas legislature is currently hearing testimony on proposed legislation that would affect credit services. The payday loan bill would reclassify payday lenders, title lenders and check-cashing services. Legislators have said they are looking to negotiate the details.

Texas payday lending regulations

Under current Texas law, payday lenders, check-cashing services and title lenders operate as “credit service organizations.” This is a business classification that was originally intended for businesses that help customers get out of debt. Credit service organizations are not subject to limitations on the interest rate they charge. Instead, CSOs are asked to pay just a licensing fee of $100 per year.

Searching for the regulatory sweet spot

Initially, the bills presented in the Texas legislature would have essentially shut down payday lending, check-cashing and title lending in Texas. Reclassifying payday lenders and forcing them to operate under usury laws would force them to charge no more than 36 percent APR. Because most payday loans have a term of two weeks, charging a 36 percent annual interest rate would put lenders out of business because this amount is not enough to support their businesses. Legislators pointed out that these lending businesses do provide a service that is needed, as evidenced by their heavy use. Sen. John Carona has called it a “gold rush,” stating that the lenders are “entitled to make a profit,” but he feels it shouldn’t be a usury-level profit.

Differentiating credit products

Though the Texas legislature is grouping payday lenders, title lenders and check-cashing businesses, these are three very different businesses. Payday lenders offer a short-term loan, secured only by a promise to pay on the next payday. If the loan isn’t paid back, the lenders have little recourse. Title lenders offer loans secured by a car title. This means if the loan isn’t paid, the lender takes possession of the vehicle. Check-cashing services cash checks for customers that cannot or do not want to go into traditional banks for their financial services.