AUSTIN — Cities are cracking down on payday lenders, but some advocates for businesses that make high-interest, short-term loans say consumers are the ones paying the price.

Thirty-eight Texas cities now restrict loan amounts to a percentage of borrowers’ income, as well as the number of times a loan can be rolled over.

Supporters of the limits say more communities are likely to adopt such rules, given state inaction to protect consumers from predatory lending.

“They end up paying fee after fee after fee at these 500 percent interest rates,” said Ann Baddour, who directs the fair financial services project at Texas Appleseed, an Austin public interest law center. “The payments never pay down the loans.”

As cities have adopted new limits, the number of Texas payday lenders has dropped from about 3,500 three years ago to roughly 2,200. The Texas industry is valued at about $5.8 billion per year.

Michael Brown, president of the Texas Organization of Financial Service Centers, said the reduction in actual use has only fallen 9 percent, however.

Many of those borrowers are likely turning to unlicensed or online lenders who don’t report to the state, added Brown, whose trade group represents about 50 small- to medium-sized lenders.

Among the communities limiting short-term lenders is Longview, which passed an ordinance that takes effect in January.

Kristen Ishihara, a Longview city councilwoman, said that cities are acting because predatory lending can trap consumers in endless cycles of high-interest debt. Her city of 80,000 people has 22 payday lenders, she said.

“It’s no universal solution but it is a step in the right direction,” said Ishihara, who led a campaign to adopt rules based on a model developed by the Texas Municipal League.

The model ordinance restricts loans to no more than 20 percent of a borrower’s gross income. It mandates a repayment period of just four installments, with each payment helping pay down the principal loan amount.

Auto-title loans are typically limited to 3 percent of a borrower’s gross income -- or 70 percent of a vehicle’s value.

Bennett Sandlin, executive director of the Municipal League, said financial regulation is not a typical city function, but his members acted because lenders were becoming “a pox on neighborhoods.”

“We’re not talking about drastic governmental regulation here,” he said. “We’re just playing defense. This is a stop-gap measure.”

Nonetheless, the rules are making an impact. A Texas Appleseed report noted indications that the number of vehicle repossessions are decreasing in some areas.

Rob Norcross, executive director of the Consumer Service Alliance of Texas, said the cities have gone too far.

He recalled recalled attending a council meeting in a city considering an ordinance based on the Municipal League’s model.

Norcross, whose members operate 70 percent of Texas’ payday lending stores, said he asked the council how many of its members had ever visited a payday lender.

“Not one hand went up,” he said.

That illustrates what he and Brown consider a key issue - the failure to understand or address a lack of access to credit.

“No one understands how many Americans don’t have $500 in case of emergency,” Brown said. “Low- and middle-income guys are having their last safety net pulled away from them.”

Some communities seek to address that with community loan centers, which are often run by employers for the benefit of their workers and offer loans capped at around 18 percent interest.

College Station, Laredo, Dallas and Houston have started such centers.

“We understand that families need access to short-term credit. A lot of communities have been spearheading the effort,” Baddour said.

The city of Longview is “looking to move forward” on a community loan center for municipal employees, said Kerry Bashaw, regional development manager for the East Texas Council of Governments.

The Council of Governments will raise the needed $250,000 to launch the effort, Bashaw said, and will provide administrative support.

Longview’s borrowers would be eligible for loans up to $1,000, payable over 12 months. Repayment comes through payroll deductions.

“We’re all about finding solutions to economic problems,” Bashaw said.

Still, Bashaw acknowledged that the center won’t be a panacea for everybody’s access-to-credit problem.

“Those who are unemployed are going to have to meet the challenge,” Bashaw said.

John Austin covers the Texas Statehouse for CNHI’s newspapers and websites. Reach him at jaustin@cnhi.com.

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