The Problem of Predatory Lending: Texas Baptists and Usury
The Problem of Predatory Lending: Texas Baptists and Usury
by Aaron Weaver
Meet “Rick.” Rick is a Vietnam War veteran who, like a growing number of Americans, is underemployed and has lived paycheck-to-paycheck for a long time. When his daughter got into a bit of financial trouble, Rick took out a $4,000 title loan against his truck to help out. Not able to pay off the loan in one payment, Rick was charged a $1,200 penalty fee per month. Rick could have paid $1,200 each month forever and never paid off the loan. Stephen Reeves, then public policy director of the Texas Baptist Christian Life Commission, shared Rick’s story at the 2009 regional meeting of the New Baptist Covenant. According to Reeves, Rick’s story exemplifies what usury looks like in the 21st century.
Throughout history, the practice of usury has been almost universally condemned. For centuries, usury has been judged by poets and philosophers and prophets and priests as an especially persistent and pernicious evil.1 During the United States founding era, interest rates on loans in all 13 colonies were capped between five and eight percent. Usury laws in the colonies and back in England were rooted in historic Christian understandings of acceptable lending practices. Protestant reformers such as Martin Luther held that interest rates of five to six percent were moral with eight percent as a permissible rate in some circumstances.2
In the early 20th century, states began to adjust their usury laws to allow for higher interest rates. The industrial age brought with it more stable household incomes and created a demand for greater access to credit through moderately-priced consumer loans with low double-digit interest rates. Following World War II, all 50 states had interest rate caps ranging from 24 to 42 percent per year on small loans. The median limit was 36 percent.3
For more than 300 years in America, usury was considered to be a serious crime and for decades federal law enforcement sought to apprehend and incarcerate usurious lenders. However, in 1978 the U.S. Supreme Court dealt a devastating blow to usury restrictions. In Marquette National Bank v. First Omaha Service Corp., the High Court was asked to decide whether the usury laws of a bank’s home state or the laws of the consumer’s home state applied in a multi-state loan transaction. Relying on the National Bank Act of 1864, the Court ruled against the consumer and issued a decision allowing national banks located in deregulated states, such as Delaware and South Dakota, to export its high interest rates to states with strict usury laws. In response, these states adopted “parity laws” to give their local financial institutions the right to charge the same interest rates that national banks could import into their communities via federal law.4
Non-bank lenders, such as finance companies and car dealerships, resented the preferential treatment that banks were receiving. These lenders began to lobby for exemptions from state usury laws and some were successful. Consequently, during the 1980s, predatory lenders began to take advantage of these exemptions and other loopholes to state usury laws. These lenders began to allow a borrower to post-date a personal check for a small amount plus a fee, payable to the lender, in return for cash. The borrower would then be obligated to buy back the uncashed check at his or her next “payday,” generally due 14 days later. In many states, these predatory lenders contended that they were in the “check-cashing” business and not actual lenders.5
In other states with traditional usury restrictions, predatory lenders partnered with banks in deregulated states to “rent” their interest rate powers per
the Supreme Court’s Marquette ruling. Predatory lenders would pay the out-of-state bank a fee to make the loan in the name of the bank. The FDIC cracked down on these practices in 2005 and ruled that deferred cash checking as well as the “rent-a-bank” model to avoid a state’s usury laws were “unsafe and unsound banking prac-tices.”6
The FDIC’s crackdown did little to hinder the efforts of predatory lenders. Starting in the late 1990s, the payday lending industry experienced exponential growth. In the early 1990s, payday lenders comprised a tiny fraction of the financial services industry with just several hundred locations. In 2004, just prior to the FDIC’s intervention, there were 22,000 payday loan storefronts in the U.S.7 Recent data has shown that — not including online lenders — there are more than 24,000 payday loan locations nationwide. 8
With an average annual interest rate of around 400 percent, the payday loan industry is now a multi-billion dollar industry. A study from The Pew Charitable Trusts reported that payday loan borrowers spend $7.4 billion annually at more than 20,000 payday storefronts and on hundreds of web-sites. More than 12 million Americans took out a payday loan in 2010 and 69 percent of borrowers took out the loan to cover the cost of a recurring monthly expense.9
In Texas, there are more payday loan storefronts than McDonalds and Whataburger restaurants combined. With more than 3,000 payday stores that handle an estimated $3 billion in loans annually and take in more than $400 million in fees each year, Texas is the corporate headquarters for industry giants Ace Cash Express, EZ Money and Cash America International.
When the FDIC cracked down on the “rent-a-bank” model in 2005, payday lenders in Texas discovered a new
way to do business. These lenders were — to the dismay of consumer protection advocates — allowed to register with the state as credit service organizations (CSOs) under Chapter 393 of the Texas Finance Code, a provision originally intended for organizations that aimed to help improve a consumer’s credit history or rating.
The payday storefront set up as a CSO, which was separate from the third-party non-bank lender. The CSO would function as the broker between the consumer and the third-party lender, and the lender would loan the money to the consumer at the 10 percent usury cap rate per the Texas state constitution. However, the CSO would charge unregulated fees for its “services” in securing the loan for the consumer. These fees could total to more than a 500 percent annual rate.
In 2010, Texas Baptists began to take notice of the predatory lending problem in their state in a formal and organized way. For more than 60 years, the Christian Life Commission of the Baptist General Convention of Texas has aimed to “speak to, but not for” Texas Baptists on a host of ethical issues in the political arena. While initially focused on confronting racial inequality and gambling, the CLC came to respond to almost every important issue to trouble American society, from family life issues such as birth control and divorce to religious liberty to economic issues such as poverty and world hunger.
With predatory lending, the CLC became involved to confront a neglected justice issue and an extremely powerful industry — an industry whose members include deacons and active laypersons in some of the conven-tion’s 5,500 affiliated congregations. The CLC also became involved after coming to understand the connection between payday lending and gambling, which the CLC has consistently and effectively opposed for decades in the Lone Star State.
CLC leaders have cited the “Thrift or Debt” report of the Institute for American Values as a formative influence that led the agency to address theproblem of predatory lending.
This report called on Texans to “leave behind the debilitating, failed practices of debt and waste and embrace a new ethic of thrift and saving.” According to the report, a two-tier financial system has emerged in recent decades in Texas. The upper tier of this system is comprised of pro-thrift institutions, including savings banks and credit unions, that provide opportunities for higher-earning families to save, invest and build wealth. However, the lower-tier of this system is made up of public and private anti-thrift institutions, such as the state-sponsored lottery, pawn shops, rent-to-own stores, payday lenders and other providers of high-interest loans. These anti-thrift institutions provide numerous ways for lower-earning families to forego savings, borrow at predatory interest rates and fall into a debt trap.10 With this linkage between the lottery (a public anti-thrift institution) and payday lenders (a private anti-thrift institution), this report provided the CLC a rationale and framework to buttress the ethic agency’s lobbying efforts in the Austin Capitol as well as with its fiercely anti-gambling Texas Baptist constituency.
Beginning in January 2010, the CLC sponsored a series of articles on predatory lending in the Baptist Standard, the news publication for Texas Baptists. These articles sought to outline a theological foundation for support of payday loan reform and did so relying on the perspectives of notable Bible and ethics scholars in Texas Baptist life. The CLC called on church leaders to preach about the responsible stewardship of resources and how to cultivate a “culture of thrift” through sponsorship of financial seminars to teach congregants and community members how to get and stay out of debt.11
At its annual conference in March 2010, the CLC highlighted the connection between gambling expansion and predatory lending through a focus on financial issues in the church. The conference emphasized the need to reclaim the importance of a culture of thrift.12 The ethics agency also ensured the adoption of a resolution
on fair lending later that year at the convention’s annual gathering. Citing the “more than 2,800 unlicensed and unregulated lending storefronts” in the state, the resolution expressed “deep concern over the currently legal, yet unethical, lending practices being used in economically disadvantaged communities throughout the state,” and urged the passage of “just laws that will limit these unfair lending practices.” It also called on churches to consider starting ministries to assist individuals in personal financial management and stewardship.13
In addition to educating Texas Baptist churches, the CLC focused on mobilizing other faith-based organizations around the issue of predatory lending. Up until that point, there was no organized faith-based effort to confront the payday loan industry. Partnering with the Texas Catholic Conference and Texas Impact (an interfaith organization), the CLC formed Texas Faith for Fair Lending. This coalition worked to educate the public as well as key stakeholders in Austin about the state’s problem of payday lending. The coalition stressed that its purpose was not to set up a new regulatory system, but to force payday lenders to operate under Section 342 of the Texas Finance Code, which already governed small consumer loans with regulations on rates and fees and oversight through the Office of Consumer Credit Commissioner. The coalition’s ultimate objective was to have the state legislature close the loophole in the Texas Finance Code that allowed payday and auto-title lenders to register as credit service organizations and avoid usury regulations. Texas Faith for Fair Lending emphasized that its purpose was not to shut down payday storefronts but to require them to operate fairly and openly like other lenders in the state.
In 2011, during the 82nd session of the Texas legislature, the CLC and the newly-formed Texas Faith for Fair Lending coalition advocated for and backed legislation to close the CSO loophole and regulate payday lend-
ers. Led by Director Suzii Paynter, the CLC endorsed legislation proposed by Senator Wendy Davis of Fort Worth that proposed to force payday and auto-title lenders to conform to regulations similar to other lenders in the state and cap interest rates and fees.14 Davis’ bill proposed limits on payday loan fees, the elimination of fees on rollover loans and included the requirement that lenders put consumers on a payment plan with no additional fees after a loan had been re-issued three times. Most importantly, Davis’ bill proposed to close the CSO loophole in Texas law that allowed predatory lenders to operate without any oversight.15
At a press conference on the steps of the Capitol, the coalition voiced their support for meaningful reform of the payday industry. The event featured a diverse group of speakers including a Catholic Bishop, a United Church of Christ minister and a Texas Baptist pastor. Thousands of postcards signed by congregants from across the state were on display at the conference, where speakers called for an “end to the cycle of debt.” Charles Singleton, director of African American Ministries for Texas Baptists, declared that the way in which payday and auto title lenders target the poor, minorities, the elderly and the military is “analogous and tantamount to financial slavery.”16
After payday legislation stalled in both the Texas House and Senate, Rep. Vicki Truitt, the Republican chairwoman of the House Pensions, Investments and Financial Services Committee offered a compromise solution in the form of three bills. Truitt’s bills were the product of a mediated negotiation between the payday industry and consumer protection groups. While Truitt’s legislation proposed restrictions on lending practices, none of her three bills proposed to limit usurious interest rates and fees.17 Instead, the bills proposed to limit loans to a percentage of person’s annual income, allow only four roll-overs of a loan each year and then require lenders to put a borrower on a payment plan without additional fees, and also require the payday industry to report data on its operations.18
Faced with the political reality that serious reform of the payday industry would not be possible during the 82nd session, the CLC reluctantly endorsed Truitt’s bills. Stephen Reeves, the CLC’s public policy director, explained that Truitt’s bills represented the ses-sion’s “best hope of positive change for borrowers.”19 The CLC and other consumer advocates had good reason to be suspicious of Truitt’s involvement as during the 2010 election cycle. Truitt received more campaign donations from the payday industry than any other rank and file lawmaker. Their suspicions were more than confirmed the following year when Truitt, after losing her seat in the 2012 Republican primary, joined the payday industry as a lobbyist just 17 days after her defeat.20
Two of Truitt’s three bills were passed. HB 2592 required payday lenders to provide notice and disclosures for consumers to make informed choices and to more easily compare the actual costs of different loan terms with other short-term loans. The second bill, HB 2594, required payday lenders to report important data each quarter to the Office of Consumer Credit Commissioner. HB 2594 also allowed for enforcement of fair debt collections practices and ensured compliance with the federal Military Lending Act. HB 2593, the lone bill that did not pass, would have capped loan amounts and placed restrictions on how many times short-term loans could be renewed. HB 2593 also would have required lenders to accept partial payment of the amount owed and apply that amount to the principal. After a borrower had paid 25 percent of the principal, the lender would be prevented from charging additional fees.21
The CLC called the passage of these two measures “a first step” and expressed their disappointment that HB 2593, the only bill intended to address the “cycle of debt,” died in the House. “The legislation does not address these most pressing concerns,” Paynter noted. “So, we are looking forward to working on the issue in the interim period and returning next ses sion to advocate for bills that would break the cycle of debt perpetuated by these products.”22
The CLC and the Texas Faith for Fair Lending coalition continued its work during the interim period and during the 83rd session in 2013, working again to pass aggressive legislation to put restrictions on payday lending in Texas. These efforts resulted in the passage of a reform bill in the Texas Senate, described by the Fort Worth Star-Telegram as “tougher than expected.” But, this legislation later died in the House Committee on Investments and Financial Services, where hearings on payday reform featured industry executives. According to one report, the payday industry hired 82 lobbyists with contracts totaling $4.4 million to defeat the reform efforts in 2013.23
While progress in the fight against usury in Texas is slow and the victories have been quite modest, Texas Baptists, in coalition with other faith groups, will (hopefully) continue to pursue the payday industry. Through their concerted efforts during the 82nd and 83rd legislative sessions, Texas Baptists and its coalition partners have discovered the problem of predatory lending to be a moral issue that unites rather than divides, bringing together liberal Protestants and conservative evangelicals, Democrats and Republicans. This still-unfolding story of Texas Baptists vs. the multi-billion dollar payday industry certainly has a David vs. Goliath feel to it.
But of course, the outcome has yet to be written. However, one thing is for certain: Texas Baptists have offered a political engagement model for other faith groups wishing to remind its parishioners of the evil of usury, and lead them to do something about the problem of predatory lending in their communities.
Aaron Weaver’s Ph.D. in Religion and Politics was earned at Baylor. He is currently communications manager for the Cooperative Baptist Fellowship and is a writer, scholar, and editor.
Footnotes found online.
Leave a Reply
You must be logged in to post a comment.
