City Hall Hustle: With Interest

Absent state action, council moves to regulate predatory lenders

Perhaps not many of the Hustle's readers have recently taken out a payday loan – easy money offered by unregulated lenders at predatory interest rates. That doesn't mean their regulation is a bad idea, and this week City Council Member Bill Spelman is offering two items regulating the laissez-faire industry. "We have got to shatter the cycle of debt these small dollar lenders force their clients into," Spelman said in a press release announcing his resolutions. "When Texans end up paying 500% interest on loans just to cover their basic living needs, there's a problem that needs to be fixed."

The resolutions, posted to council's agenda this week (Thursday, Aug. 18), tackle the issue on two fronts. One addresses land use and zoning for the businesses, modeled after a similar resolution from Dallas City Council Member Jerry R. Allen (whose office Spelman consulted). Noting that "the City of Austin does not have the authority to regulate interest rates, but does have land use authority," the resolution prohibits "alternative finan­cial service busi­nesses" – including payday and auto-title lenders, but excluding banks, grocers, and convenience stores – from locating within 1,000 feet of one another, within 500 feet of a highway, within 200 feet of residential zoning, or anywhere within the city's East Austin Overlay District, Water­front Overlay District, or University Neighborhood Overlay District. Chris Riley and Mike Martinez are signed on as co-sponsors.

The second resolution, while powerless to address the exorbitant interest rates such lenders charge, seeks "to protect the welfare of the citizens of the City by monitoring credit access businesses in an effort to reduce abusive and predatory lending practices," according to its language. It would accomplish this by capping payday loans at a verifiable 20% of an applicant's monthly income and auto-title loans at 70% of the vehicle's retail value or 3% of the owner's gross annual income, whichever is less. Loan extensions may not be stretched out further than four installments, with proceeds in each installment paying down at least 25% of the principal. Loans also cannot be refinanced, or "rolled over" – the revolving trap most borrowers fall into – more than three times. It also creates a registration database of payday and auto-title lenders and requires the display of an annual certificate of registration, as well as the maintenance of lending records. Any offense would be a class C misdemeanor, punishable by a $500 fine. Mayor Pro Tem Sheryl Cole and Laura Morrison are named as co-sponsors on this item (so that's probably five votes right there).

The 82nd Legislature recently passed payday loan regulation, over some objections that the bills didn't go far enough (e.g., they don't cap interest rates). Spelman called the Lege action "an important first step," adding, "Now it's up to the City Council to reach out as far as it can to help Austin residents trapped under a viciously deep and unfair pile of debt."

Members of that legislative session were on hand at a press conference this week highlighting the initiatives. Austin Rep. Eddie Rodriguez, who had worked with former House speaker Tom Craddick on predatory lending regulation, conceded: "We were moving the ball forward pretty well; it just died toward the end. But this really does cross party lines. It doesn't matter if you're a Democrat or a Republican – every one of us has constituents that are affected by this." Driving the point home was Republican state Sen. Jeff Wentworth, who used decidedly blunter rhetoric, quoting a speech from Marine Corps Maj. Gen. Mike Lehnert describing payday lenders as "parasites, bottom-feeders, and scumbags." (Spel­man's resolution notes that the Depart­ment of Defense made a finding "that these loans 'undermine military readiness, harm the morale of troops and their families, and add to the cost of fielding an all-volunteer fighting force.'")

Also on hand was Walter Moreau, executive director of Foundation Communities, a housing nonprofit that offers free financial education among its many services. He told the story of a client who had borrowed $500 from a predatory lender at a cost of $100 interest each time he rolled over the loan. He rolled it over seven times; Moreau said a lender lobbyist conceded to him that seven rollovers is in fact the industry average.

At the press conference, questions from the media dwelled on the city's authority to regulate the lenders. Asked if he had heard any convincing arguments from lenders, Spelman said, "I haven't heard it yet." Absent regulation of interest rates, he called the measure "a first, very 'toe in the water' regulation" of the industry. As for any legal challenge, he said, "I'd love to see them defend a 620 annual percentage rate loan."

Also there to offer some context was Mayor Pro Tem Cole, who noted the city's leadership "can't be just about environmental stewardship and economic development." It was a welcome reminder that many of the issues perennially roiling Austin sail far over the heads of many citizens who are struggling just to get by.

Here's an item of interest: The Hustle is on Twitter @CityHallHustle.

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