Two years ago, on a 2½-mile stretch of Westheimer between Gessner and Voss, strip malls lining the roadway had no fewer than 11 storefronts hawking payday and auto title loans. Anyone in need of a quick buck – and willing to pay exorbitant interest rates – could choose between Cash America, Loan Star Title Loans, TitleMax, EZ Money Loan Services, Ace Cash Express, two First Cash Advance outlets and several independent operators.
Today, only two of those storefronts remain to offer the short-term, high-interest loans to people who have no other place to turn: the large national chains Ace Cash Express and Advance America.
The pattern on Westheimer has been repeated on commercial thoroughfares across Houston after a local law took effect in July 2014 to restrict the activities of small-dollar lenders that can otherwise charge as much as 500 percent interest. Since then, the number of licensed payday and title loan companies in Houston proper has plunged 40 percent, to 187 from 310, while transactions across the metro area have fallen by 27 percent.
It looks like a dramatic turnaround for a city that once seemed to have a payday lender on every street corner, but the effect on the working poor who use these services remains unclear. City officials concede that they don’t know whether customers are finding better lower-cost alternatives or simply driving beyond the city limits, using online payday lenders, or turning to unlicensed businesses or loan sharks.
One thing remains certain: The reasons people who live paycheck to paycheck turn to these lenders, and the high rates they charge, are largely unchanged.
Betty Walter recently walked out of Ace Cash Express near Hobby Airport with a $600 loan to fix her car, her only way to work. After all the fees and interest, she’ll end up paying back about $1,400. But she absolutely needed to keep her job at a veterinarian’s office and had nowhere else to get the money.
“If you’re desperate, you just pay it,” Walter said. “I would probably pay more.”
A statewide push
Payday and auto title loans are a form of cash advance available to people who might not have access to other forms of credit. Because of the hefty fees and high interest rates, customers very often can’t afford to make payments, and so end up refinancing ever-growing balances again and again – what regulators call a cycle of debt that is nearly impossible to break.
Houston was far from alone in adopting restrictions on small-dollar loans. With efforts to pass state legislation stymied by industry lobbying, a coalition of faith groups and community activists has worked for a half-decade to persuade local jurisdictions to adopt ordinances to curb lending practices that most often trap people in cycles of debt. Thirty-five Texas communities have passed local laws that typically require lenders to ensure that borrowers have some ability to repay the loans and limit the number of installments, which allow lenders to earn more interest and charge more fees.
Since that push began, the industry’s footprint has shrunk markedly. In a report published in June, Texas Appleseed, an Austin nonprofit, found that the number of storefronts in Texas fell by 25 percent between 2012 and 2015.
“The ordinances have been very effective in their goal, which is to shut down credit access businesses,” says Michael Brown, who runs a Corpus Christi-based consultancy for small-dollar lenders.
Overall loan volume, however, hasn’t decreased as much as the number of storefronts – just 9 percent in Texas between 2012 and 2015. That suggests two things: The establishments that remain are raking in more business, and customers are migrating to company websites, which local jurisdictions are unable to regulate.
Archie Gall runs Star of Texas Financial Solutions, a payday lender with operations in Waco, Killeen, Austin and Temple, all of which have passed ordinances restricting payday lending in recent years. He said he’s pretty sure that many of his customers need more money than they can afford to pay back in the reduced number of installments allowed by the laws.
As a result, they take out several smaller loans from different lenders using the same pay stubs. Then they default, at the rate of about one in five loans, which he said is higher than in the past.
“They need that money now, so they’re going to say what they need to say to get that money,” Gall said.
Gall estimated his business is down by about 20 percent because he can’t lend out as much money to customers with lower incomes. He hasn’t closed any stores but has cut a few jobs.
He has also recently launched an online business, which puts him beyond the reach of local regulations.
“You almost have to ask,” he said, “why am I going to open stores and employ people anymore?”
Still easy to get a loan
So what, exactly, is going on in Houston underneath the numbers? Let’s start with where the payday lenders are moving – or aren’t moving.
Back when the city’s ordinance passed, critics suggested that licensees would hop just outside the city lines to avoid the new law. That does not appear to have happened: An analysis of licenses shows no significant movement across jurisdictions.
Closures of payday lenders, meanwhile, have been spread across the city, but fallen particularly heavily on commercial corridors in places like Spring Branch East, Alief, the Northside, Gulfton and a cluster by George Bush Park. A smattering of new places has opened, but none inside Loop 610. (Find an interactive map of stores that have opened and closed here.)
The number of independent operators and smaller chains – of which there weren’t all that many in the first place – has shrunk to nearly zero. An outfit called KJC Auto Title Loan, which used to have eight outlets in the city, has since gone bankrupt. Texas EZ Money, which used to have 45 licenses in Houston, surrendered all of them when its parent, EZ Corp. of Austin, left the payday business entirely in July 2015.
PLS Loan Store relinquished its 12 lending licenses, although it still maintains several locations in the city, offering a suite of financial services like insurance and prepaid debit cards. TitleMax, a title loan outfit, has gone from holding 40 licenses to 31. Payday lender Advance America went from 31 licenses to 20. A few smaller chains, including Loanstar, Speedy Cash and the Cash Store, have stayed about the same size.
All of those, with the exception of Speedy Cash, declined to comment or did not respond to requests for comment. Ace Cash Express deferred to Rob Norcross, whose public relations firm represents an industry lobby group called the Consumer Service Alliance of Texas. He emphasized that in the wake of the ordinances passing in Texas cities, loan fees have gone up as defaults have risen and profits declined.
“Ironically,” Norcross said in an email, “the ordinance passed by over 30 Texas cities to ‘protect’ consumers has raised prices.”
It’s true that the average fee per transaction has risen by 6.5 percent in the Houston metro area since the city’s ordinance went into effect, but those fees were increasing at about that pace before the law took effect. The percentage of people who extend loans – thus incurring higher fees – has also jumped from a low in 2014, but the oil crash, rather than regulatory changes, could be driving those numbers.
Where to turn?
So if fewer people are going to newly constrained payday and auto title lenders, what are they doing when they have a desperate need for cash? A number of things.
John Branch is a neighborhood leader in Independence Heights, which lost a handful of lenders. He said people might be going to pawnshops, which are more strictly regulated by the state. He could be right: State data show that the number of pawnshops has risen slightly in the Houston area since 2014.
Another possibility: Less reputable businesses may offer loans that don’t conform with the ordinance. The city only investigates small-dollar lenders if it receives a complaint. Local regulators have received 18 since the ordinance went into effect, and two were deemed valid. The complainants, however, decided not to pursue them.
A few less expensive alternatives also have popped up in recent years. An installment lender called Oportun operates kiosks in Hispanic supermarkets, going from 10 outlets in 2014 to 16 outlets today. It charges an annual percentage rate of between 30 and 40 percent. A nonprofit loan center run by the Neighborhood Recovery Community Development Corp. makes small loans to workers of participating employers, who facilitate payments through payroll deductions. That allows the loan center to charge lower interest rates, about the same as a credit card.
To Silvia Chicas, an organizer with the advocacy group Texas Organizing Project, the city ordinance still doesn’t address the underlying problems. Clamping down on payday lenders hasn’t gotten rid of the reasons why people find themselves in desperate situations – low incomes, little access to mainstream credit and personal catastrophes, from car breakdowns to sudden medical expenses (“Stuff happens,” says an Ace Cash Express billboard in Houston, with a cartoon of a leg in a cast).
The local law also doesn’t limit the amount of interest people are charged if they can show adequate earnings, as long as the loan can be repaid in four installments or less.
“Even within the confines of the ordinance, you can still take advantage of someone for everything they’re worth,” she said. “If anything, that fortifies (small-dollar lenders) more, because the small guy in the corner has shut down, but the need is still there, so they’re still getting that business.”
Besides, she added, most people are unaware of the few other options out there.
“If someone were to come to me asking for an alternative to a payday loan,” she said, “I’m not sure what I would tell them.”
This story originally appeared 8/21/2016 in the Houston Chronicle.