The Denton City Council adopted new rules this week that restrict the city’s short-term lenders in ways similar to ordinances passed recently in Austin, El Paso, Dallas and San Antonio.
While the ordinance – which carries with it criminal penalties for violations – goes into effect April 9, it’s unclear how long the city’s rules will stand. A pair of bills working through the Texas Legislature would pre-empt cities from regulating payday, title and other short-term lenders.
Deputy city attorney John Knight told the council that the city expects many of the current storefronts would not be compliant with the city’s rules as they operate now. There are at least 39 businesses in the city, most clustered in poorer neighborhoods, which offer payday, title and other short-term loans.
According to state reports, 70 percent of Texans are unable to repay a short-term loan after the original term. On average, it costs about $840 for the average Texan to repay a $300 loan.
Denton modeled its new ordinance after the city of Dallas, which withstood a legal challenge from the lending industry. The city requires lenders to structure their loan repayments in no more than four installments, each of which must pay down 25 percent of the loan amount.
Denton also requires that any extension of a loan that is supposed to be repaid in a lump sum may not be refinanced or renewed more than three times. The proceeds from each refinancing must pay down at least 25 percent of the original loan.
The credit storefronts would also be limited in the amounts they can loan, depending on the value of what is pledged. For example, a cash advance that is guaranteed by a car title could not exceed 70 percent of the vehicle’s value or 3 percent of the individual’s annual gross income – whichever is less.
Other cash advances couldn’t exceed 20 percent of the borrower’s monthly gross income.
In an interview Wednesday morning, Knight said the city’s ordinance is written narrowly and would apply only to those storefronts that are operating under the part of the Texas Finance Code that regulates credit-access businesses. It wouldn’t apply to pawn shops or to lenders who are licensed and operating in another part of the Texas Finance Code.
Rudy Aguilar, director of consumer protection with the Office of Consumer Credit Commissioner, said the state’s regulated loan provision has been in existence since the 1960s and was one of the agency’s first responsibilities.
Texas has more than 1,800 businesses with regulated loan licenses that offer small consumer loans that reach $1,200 to $1,300. They are regulated under Chapter 342 of the finance code.
The credit access businesses have only come about in recent years under a loophole in the law that allows fees for credit repair, Aguilar said.
If the new amendments before the Legislature are passed, the loophole would be closed, he said.
Of Denton’s 39 small lenders, 7 are licensed as pawn shops, 17 are licensed as credit access businesses and 13 appear to be operating under Chapter 342.
The city is working out final details and will be visiting with the various businesses soon about the new rules, Knight said.
That will likely include some kind of public posting of the local license and the local rules inside the business with a number to call to report suspected violations – a directive that came from the city council.
Knight said he had heard reports that some storefronts in cities with tougher rules will direct borrowers to complete their loan paperwork in another city that has no ordinance.
“We have heard about these ‘run-across-the-border’ approaches,” Knight said. “The approach we would take is that an act relating to the process would have to happen here … [then] it would be subject to our ordinance.”
Pat Smith, of Serve Denton, and Joe Ader, pastor of Village Church, were both in Austin Tuesday morning, testifying before the Texas Senate Business and Commerce Committee about the effects of predatory lending on the community. They came back to Denton in time to address the city council in support of the new rules Tuesday night.
“I don’t think there is support in the capital for what this ordinance does, but what happens with pre-emption remains to be seen,” Smith said.
Burroughs told the audience in the chambers Tuesday night that he hoped the community would find other ways to meet borrower’s needs.
“The responsible alternatives are few and far between,” Burroughs said.
Staff writer Rachel Mehlhaff contributed to this report.
PEGGY HEINKEL-WOLFE can be reached at 940-566-6881. Her email address is pheinkel-wolfe@dentonrc.com.
