State Reps. Tom Craddick and Eddie Rodriguez are a political odd couple united by their legislation that payday lenders say will put them out of business.
Craddick is a Midland Republican, former speaker of the House and 42-year legislative veteran with a pro-business background. Rodriguez, an Austin Democrat beginning his ninth year in office, is an advocate for the poor with a strong pro-consumer record.
They have filed identical legislation, however, because of reports that lenders making short-term loans are legally sidestepping interest rate caps by charging fees that can push annual interest rates above 500 percent . Sen. Wendy Davis, D-Fort Worth, is carrying legislation in that chamber.
In Craddick’s case, his involvement was prompted by the publicized plight of a Midland maid who borrowed $6,300 on an auto-title loan to pay for her stepson’s funeral. When the Midland Reporter-Telegram reported in 2008 that she had paid more than $12,000 over 11 months without reducing the loan amount, the story struck a nerve with Craddick’s constituents.
Craddick, a successful businessman, looked at the loan terms. “I just thought the loans were ridiculous,” he said.
For Rodriguez, such stories are a common theme as the storefront industry concentrates in the strip malls of his East Austin legislative district. Though Rodriguez says there is a role for payday lenders, he argues they have gone too far. “I think they are preying on people who need money right now,” he said.
Payday lenders have flourished in Texas — Cash America Inc. of Fort Worth, ACE Cash Express of Irving and EZCorp Inc. of Austin, for example — as several states, including Ohio, Arizona, Montana and Arkansas, have either restricted the loans or eliminated them. In 2007, Congress passed restrictions on the loans that could be made to the military.
“We are not opposed to effective, meaningful oversight,” said Rob Norcross, a spokesman for the industry’s trade association, the Consumer Service Alliance of Texas. “But most legislation we’ve seen would effectively put the industry out of business.”
In 2009, the industry blocked legislation being considered by the Legislature before it reached the floor, and its influence at the Capitol continues today.
For example, Gov. Rick Perry appointed William “Bill” White, a Cash America executive, as chairman of the Texas Finance Commission, which writes lending regulations.
Legislation by Craddick and Rodriguez, however, addresses an issue in the law, not regulations.
Critics say payday lenders are using a law — created for the benefit of credit counseling companies — to avoid a 10 percent cap on the interest charged on loans. They join with lenders who make the 10 percent loans, but the storefront companies then add fees for servicing the loans — taking the applications, reviewing the applicant’s credit and collecting payments.
The legislation would outlaw third-party fees for arranging consumer credit. Payday and auto-title lenders would then be regulated, as any other lenders are.
“It doesn’t put them out of business,” Craddick said. “It just closes a loophole.”
Regulating the industry, Rodriguez said, would still allow a high annual percentage rate — as much as 135 percent.
Norcross said there is misunderstanding about the industry. He said the interest rate calculation is a federal requirement that allows consumers to compare loan rates on an annual basis that doesn’t reflect what happens in the short-term loan industry.
In Texas, Norcross said, short-term loans are typically for 14 to 30 days. The loan average is $275.
Interest rates are capped at 10 percent, but Norcross said the fees typically run $15 to $22 for a $100 loan.
Most consumers, Norcross said, would say the loan rate is 15 to 22 percent.
The problem comes when consumers don’t repay their loans and have to refinance.
“Almost 60 percent can’t make that first payment,” Rodriguez said.
The industry says tales of consumers trapped in cycles of debt, such as the maid in Midland, are isolated cases.
“Actually, the people offered, if I dropped the bill, to take care of the lady,” Craddick said of his bill in 2009. “I said, ‘That’s not how it works.'”
Craddick and Rodriguez said their side is better organized this time.
Unlike in 2009, when several solutions were offered, the two have a common approach backed by a broad coalition of church groups, retirees and consumer groups.
Craddick said even an archbishop who delivered the invocation for the House of Representatives lined up a few votes while he was on the House floor.
“I like our odds better this time,” Craddick said.
Walter Moreau, executive director of Foundation Communities in Austin, said the support of conservatives such as Craddick will assist in a Legislature dominated by Republicans.
“We’re generally bleeding-heart liberals,” Moreau said. “But I’m optimistic that there is a broad enough coalition to get something passed.”