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HomeMy WebLinkAboutCFW_Payday_Lending_RegulationsPayday Lending & Auto Title Lending(Credit Access Businesses)Planning & Development and City Attorney’s OfficeAugust 27, 2019 2Overview of Payday LendingReview:•Background•Regulation of lenders•Model ordinance•Common zoning regulations•Long term strategiesSource: Fort Worth Star Telegram 3What is a Payday Loan?•A payday loan – which might also be called a “cash advance” or “check loan” – is a short-term loan,generally for $500 or less, that is typically due on the borrower’s next payday.•A fixed fee is paid to borrow the money, even if it is for a week or two. •Fees may range from $10 to $30 for every $100 borrowed, depending on the lender. There is no limit on the fees that can be charged in Texas.•If the loan is renewed or rolled over, the borrower will be charged another fee and still owe the entire original amount.Source: National Catholic Reporter 4Who uses payday loans? •Approximately 12 million Americans annually •On average, a borrower takes out eight loans of $375 each per year and spends $520 on interest.•75 percent of borrowers use storefront lenders and almost 25 percent borrow online •Average borrowers take out eight payday loans per year, spending about $520 on interest with an average loan size of $375•Majority of payday loan borrowers are white, female and are 25 to 44 years old •Pew Charitable Trust identified five groups that have a higher likelihood of using payday loans: •Those without a four year college degree•Home renters•African Americans •Those earning less than $40,000 per year •Those who are separated or divorced 5 6Why do borrowers turn to payday loans? •69 percent•Recurring Expenses -utilities, credit card bills, rent or mortgage payments, or food•16 percent•Unexpected Emergency – such as car repair or emergency medical expense 7•Borrowers do not turn online to borrow•Research by Pew Charitable Trust found that the rate of online borrowers in states that banned payday lending is only slightly higher – 1.58 percent •When storefront payday loans are unavailable –only 5 out of 100 opt for an online loan •The financial burden does not go away - 69 percent of borrowers use payday loans to pay for regular expenses •Choosing another option with a formal financial institution is not common practice•81 percent of payday loan borrowers surveyed in other states stated their first choice was to cut back on expensesWhat do borrowers do without payday loans? 8How a Payday Loan WorksSource: Texas Appleseed Project 9Regulation of Payday Lenders•Federal•Truth in Lending Act•Military Lending Act•Consumer Finance Protection Bureau (CFPB)Rules (effective November 19, 2020)•State•Primary State Statute (Credit Access Business)•Chapter 393, Texas Finance Code: Credit Services Organizations•Administrative Rules•Chapter 83, Subchapter B, Texas Administrative Code•Municipal OrdinancesSource: Pew Charitable Trust 2017 10Municipal Regulation of Payday Lenders•Twoapproaches of regulation:•Business regulations: Cities are not expressly prohibited from adopting ordinances regulating the credit access or fees charged.•Land use/zoning regulations.•Over 40 Texas cities have adopted business regulations similar to the TML model ordinance and 16 regulate through land use/zoning. •Six cities use both land use/zoning and business regulations. Source: Federal Reserve Bank- Dallas 2016 11TML Model Ordinance •Require registrationwith the city and annual renewal.•Limit the loan amount:•Based on the borrower’s gross monthly income, usually not to exceed 20%.•Auto title loan amount based on borrower’s gross annual income 3% or total retail value of auto 70%.•Limit the number ofinstallment payments four (4) and requirement that proceeds be paid to at least 25% of principal of loan. •Limitthe number ofrenewal or refinancing of single lump sum at least 25% of the principal amount of the loan and requirement that proceeds be paid to at least 25% of principal of loan.•Loans made to a consumer within seven days of a previous loan has been paid by the consumer constitutes a refinancing or renewal.Source: Fort Worth Weekly 12•Require maintenance of records for three (3) years and make available for city inspection.•Requirement of Consumer Understanding of Agreementfor every agreement, refinancing and renewal.•Must be provided in language of preference of consumer•If consumer cannot read, agreement to be read to consumer•Referral to consumer credit counseling.•Form providing information on non-profit agencies that provide financial education and training programs and agencies with cash assistance programsSource: Fort Worth WeeklyTML Model Ordinance 13Common Zoning Regulations•Definitionof the use: (Credit access business) payday and auto title lending •Restrict to certain zoning districts•Requirement of special use permit or conditional use permit•Distancerestrictions from other payday lenders, highways, residential usesSource: Idaho Press 14Long Term Strategies•Education•Community loan pool•Small Banks and Credit Unions•Bank alternatives•TML Model Ordinance•Support statewide legislationSource: Federal Reserve Bank - 2014 Questions?Comments?