Academic journal article Texas Journal on Civil Liberties & Civil Rights

Texas's New Payday Lending Regulations: Effective Debiasing Entails More Than the Right Message

Academic journal article Texas Journal on Civil Liberties & Civil Rights

Texas's New Payday Lending Regulations: Effective Debiasing Entails More Than the Right Message

Article excerpt

I. INTRODUCTION ..........212

II. Interested Groups ..........215

A. Consumers ..........215

B. Payday Lenders ..........216

C. Government Actors ..........217

III. JUSTIFICATIONS FOR REGULATION ..........217

A. Liberty ..........217

B. Market Failure ..........219

1. No Price Competition; Collective Action Problems .....219

2. Information Problems ..........221

3. Externalities ..........224

IV. WHAT A DEBIASING DISCLOSURE MESSAGE SHOULD AIM TO DO ..........224

V. EVOLUTION OF THE TEXAS PAYDAY LENDING INDUSTRY ..........226

A. Texas Authorizes Payday Lending Within Limits ..........226

B. The CSO Business Model Is Created ..........228

C. Lovick v. Ritemoney, Ltd. and Its Impacts ..........230

VI. LEGISLATION CONSIDERED OR PASSED IN 2011 ..........231

A. Craddick/Rodriguez Approach ..........231

B. Truitt Approach ..........233

1. H.B. 2593, the Rollover and Rate Regulation Bill ..........233

2. H.B. 2592, the Posting and Disclosure Bill ..........235

3. H.B. 2594, the Licensing Bill ..........239

VII. SUMMARY OF OPPORTUNMES FOR AGENCY CREATIVITY .....242

VIII. WHAT TEXAS HAS DONE: DESIGNED A DISCLOSURE WITH THE RIGHT MESSAGES ..........243

A. The Messages ..........243

B. Evaluating the Messages in Light of the Five Biases ..........245

IX. WHAT TEXAS HAS NOT DONE: ENSURED CONSUMERS WILL HEAR THE MESSAGES ..........247

X. WHAT TEXAS SHOULD DO ..........248

XI. CONCLUSION ..........249

I. INTRODUCTION

Like the proverbial tree falling in the woods, the message of a consumer disclosure must land close to a person to be heard. This Note evaluates recently-adopted Texas payday lending laws and their resulting regulations. It reaches two conclusions: (1) the statutes contained sufficient powers to enable regulators to provide consumers with important cautionary advice; and (2) the resulting regulations do not exercise those statutory powers effectively by failing to ensure that consumers actually hear the advice.

In 2011, the Texas legislature passed two bills seeking to regulate the practice of payday lending, H.B. 2592 and H.B. 2594," both by Representative Vicki Truitt, Chair of the House Committee on Pensions, Investments, and Financial Services (PIFS). The statutory framework adopts both licensing and disclosure requirements, with delegations of rulemaking authority to the Finance Commission of Texas. The bills took effect on January 1, 2012, and a set of regulations has also been issued. This Note pays careful attention to the final language in the new laws and argues that the laws gave the finance commission the power to create an innovative regulatory approach to payday lending. An innovative approach would have drawn upon recent experiences from other states in order to write rules aiming to help consumers make better choices when deciding whether to take out a payday loan. The Note concludes that the finance commission did not design such an innovative program. This Note's examination of the choices that could have been made in Texas may help consumer advocates develop effective strategies in other states.

Generally, a payday loan is a loan for a small amount of money, secured by the next paycheck (either through an actual post-dated check or a direct draw on the consumer's account). The term of the loan is typically for the amount of the anticipated paycheck due two weeks later. The loan has an interest rate and associated fees. Together, the fees and interest typically produce actual annual percentage rates (APRs) above 400%.2

The only way for a consumer to get out of paying the full amount (including all fees and interest) at the end of the loan is to renew the loan (sometimes called a rollover), which comes in the form of another twoweek advance, usually under the same terms. …

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