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Widen payday loan limits

December 28, 2006 - Austin, Texas

Last September, Congress passed a law that limits the rate of interest that can be charged on a loan to members of the U.S. military and their families to 36 percent.

That bill, signed by President Bush and effective in October 2007, is designed to protect military personnel from predatory lenders who loan money at ridiculously high interest rates. Those rates, which can soar past 300 percent on an annual basis, can mire borrowers in rolling short-term debt and wreck their credit.

But if a 36 percent interest ceiling is good enough for the military, why not for all the regular Joes and Janes who find themselves in need of a quick loan?

So-called payday loans have grown into a $28 billion business in the United States, and Texas is a major player. Anyone with a regular job and a pay stub to prove it can borrow several hundred dollars for two weeks or until the next pay period. They must leave a signed check for interest and fees that can be cashed on the next payday.

The problem is that many of those borrowers cannot pay off the full loan by the next pay period and end up borrowing again just to pay the interest, which is about 400 percent on an annual basis. Payday loans can sink a family into almost endless debt as the interest continues to roll over and grow, which is why Congress limited the interest rate for uniformed personnel.

Eleven states have effectively outlawed payday loans and several others, including Texas, have attempted to curb the predatory aspects of the practice. Texas limits interest payments to 10 percent on most consumer loans, but payday lenders have found escape clauses that allow them to charge high fees and higher interest rates.

Payday lenders tried to get a bill through the Legislature in 2005 that would allow them to charge higher rates for short-term loans, and they almost succeeded. But state Rep. Trey Martinez Fischer, a San Antonio Democrat, killed the bill on a point of order late in the session. Still, the lenders find ways to maintain outrageous charges.

One practice, cited this month by the Center for Public Policy Priorities in Austin, is the use of credit service organizations as fronts for payday loans. Payday lenders once used out-of-state banks to avoid state usury laws, but the federal government shut that down. So some lenders now register as credit service organizations.

Credit service organizations are supposed to help people get out of debt, but payday lenders use them as third-party lenders to make loans and charge a fee and a high annual interest rate.

The state attorney general's office has upheld the credit service organization dodge for payday lenders, so it is up to the Legislature to close that avenue and limit the interest that can be charged on a payday loan.

There clearly is a demand for short-term loans, but there ought to be a reasonable limit on the fees and interest that a lender can charge. If it's good enough for military personnel, it should be good enough for average Texans who find themselves in a financial pinch.

News Source

The Statesman, Editorial Board

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