From
Megan Mahan
Title
Ordinance of the City of Grand Prairie, Texas, amending Chapter 17 of the Code of Ordinances of the City of Grand Prairie, Texas by the addition of Article V, Credit Access Businesses, which sets forth registration requirements and credit extension guidelines for credit access businesses; providing for a fine of up to $500 for each offense in violation of this ordinance
Presenter
Megan Mahan, Assistant City Attorney
Recommended Action
Approve
Analysis
“Our efforts to reform payday lending in the state legislature are at a stalemate. To make progress at the state level, we must act locally by encouraging our city leaders to pass city ordinances regulating predatory lending.” -- Rep. Mike Villarreal (D - San Antonio), Chairman of the Texas House Committee on Investments and Financial Services
While many other states have enacted laws to restrict predatory lending practices, meaningful reforms have failed to pass the Texas Legislature in the last three sessions. Free of any statewide cap on lending fees, limits on loan rollovers, and other restrictions, the number of payday and auto title loan stores in Texas has exploded, with over 2,000 new storefronts opening in the last six years. In the absence of state action, Texas cities are stepping up to adopt ordinances to protect their citizens from some of the worst predatory practices of this industry.
Payday lending is a practice where a person can walk into a store, typically located in a strip mall, and take a cash advance on his or her next paycheck. Most such businesses offer a similar cash advance with a car’s title as collateral. The interest rates on the loans are very high. In fact, legal loopholes used by the lenders exempt them from the state’s usury laws.
Interest rates, when fees are included, often exceed 500 percent APR. Fifteen states limit the APR to 36 percent. The products are marketed as two-week or one-month loans, but the vast majority of borrowers refinance, often six to ten times. In addition to the traditional short-term payday loan, companies have started to offer expensive longer term installment loans. One company offers a five-month installment loan for $1500. Customers must pay back over $3,862, an APR of 612 percent.
Borrowers who fall behind on payments can refinance multiple times; meanwhile, the interest and other fees keep piling up. It’s not uncommon on the auto title lending side for people to lose their car altogether after multiple refinancings.
In Texas and across the country, the payday and auto title lender industry (also known as the “credit access business”) has grown dramatically. The Texas Office of Consumer Credit Commissioner (OCCC) reports that there are an estimated 3,000 credit access business locations in Texas alone. There are 23 credit access businesses in Grand Prairie. With the proliferation of the credit access business industry comes increased concerns about the harmful effects of Texas citizens entering a cycle of debt and dependency. Some cities are also concerned about public safety and the effect the businesses may have on property values. As a result, forty-nine cities have enacted a substantially similar ordinance to what is being proposed in the City of Grand Prairie.
Financial Consideration
The cost to administer this program will be minimal. The Police Department in conjunction with the Internal Audit Department will be reviewing the businesses’ records. Additionally, the cost of creating a registration process will be defrayed by the application fees collected.
Body
AN ORDINANCE OF THE CITY OF GRAND PRAIRIE, TEXAS, AMENDING CHAPTER 17 OF THE CODE OF ORDINANCES OF THE CITY OF GRAND PRAIRIE, TEXAS BY THE ADDITION OF ARTICLE V, CREDIT ACCESS BUSINESSES, WHICH SETS FORTH REGISTRATION REQUIRMENTS AND CREDIT EXTENSION GUIDELINES FOR CREDIT ACCESS BUSINESSES; PROVIDING FOR A FINE OF UP TO $500 FOR EACH OFFENSE IN VIOLATION OF THE ORDINANCE; PROVIDING THIS ORDINANCE BE CUMULATIVE; PROVIDING FOR SEVERABILITY, GOVERNMENTAL IMMUNITY, INJUNCTIONS; PROVIDING PUBLICATION AND AN EFFECTIVE DATE
BE IT ORDAINED BY THE CITY COUNCIL OF THE CITY OF GRAND PRAIRIE, TEXAS:
WHEREAS, the practices of credit access businesses cause members of our community to become trapped in a cycle of short term, high interest loans resulting in large debt and huge payments; and
WHEREAS, the Pew Charitable Trusts, in their publication entitled Payday Lending in America: Who Borrows, Where they Borrow, and Why, (July 2012), wrote that “payday loans are sold as two-week credit products that provide fast cash, but borrowers are actually indebted for an average of five months per year.” The report further noted that “on average, a borrower takes out eight loans of $375 each per year and spends $520 on interest;” and
WHEREAS, the Pew Charitable Trusts, in their publication entitled Payday Lending in America: Who Borrows, Where they Borrow, and Why, (July 2012), also noted: “How much borrowers spend on loans depends heavily on the fees permitted by their state. The same $500 storefront loan would generally cost about $55 in Florida, $75 in Nebraska, $87.50 in Alabama, and $100 in Texas, even if it were provided by the same national company in all those states. Previous research has found that lenders tend to charge the maximum permitted in a state;” and
WHEREAS, the Pew Charitable Trusts, in their publication entitled Payday Lending in America: Who Borrows, Where they Borrow, and Why, (July 2012), also stated that “the vast majority of borrowers use the loans on a long-term basis, not temporary one. Thus it seems that the payday loan industry is selling a product few people use as designed and that imposes debt that is consistently more costly and longer lasting than advertised;” and
WHEREAS, the Community Financial Services Association of America (CFSA), the national trade association for companies that offer small dollar, short-term loans or payday advances includes the following in the “Member Best Practices”: “Members shall not allow customers to rollover a payday advance (the extension of an outstanding advance by payment of only a fee) unless expressly authorized by state law, but in such cases where authorized will limit rollovers to four or the state limit, whichever is less.” The need for consumer understanding was also outlined : “A contract between a member and the customer must fully outline the terms of the payday advance transaction. Members agree to disclose the cost of the service fee both as a dollar amount and as an annual percentage rate (“APR”);” and
WHEREAS, the Center for Responsible Lending, a non-profit, non-partisan organization, states that: “car title loans are based on the value of a borrower’s car - the ability to repay the loans is not factor in the lending decision…”; “loan rates for a car title are typically 20-30 times that of rates charged by credit card issuers…”; “the average car title customer renews their loan 8 times…”; and, “on a $500 title loan, this average customer will pay back $650 in interest over eight months; the principal borrowed will be in addition;” and
WHEREAS, lenders hold onto the motor vehicle title and when borrowers cannot continue to pay the fees, they can lose their vehicles, which can drastically affect the borrower’s means of transportation for work and other essential household functions.
NOW, THEREFORE, BE IT ORDAINED BY THE CITY COUNCIL OF THE CITY OF GRAND PRAIRIE:
SECTION 1. That Chapter 17 OFFENSES AND MISCELLANEOUS PROVISIONS of the Code of Ordinances of the City of Grand Prairie is amended by the addition of ARTICLE V: CREDIT ACCESS BUSINESSES, which should read as follows:
Sec. 17-71. Purpose.
The purpose of this article is to protect the welfare of the citizens of the City of Grand Prairie by monitoring credit access businesses in an effort to reduce abusive and predatory lending practices. To this end, this article establishes a registration program for credit access businesses, imposes restrictions on extensions of consumer credit made by credit access businesses, and imposes recordkeeping requirements on credit access businesses.
Sec. 17-72. Definitions.
For the purpose of this article, the following definitions shall apply unless the context clearly indicates or requires a different meaning:
Certificate of registration means a certificate of registration issued by the director under this article to the owner or operator of a credit access business.
Consumer means an individual who is solicited to purchase or who purchases the services of a credit access business.
Consumer’s language of preference is the language the consumer understands best.
Credit access business has the meaning given that term in Section 393.601 of the Texas Finance Code.
Deferred presentment transaction has the meaning given that term in Section 393.601 of the Texas Finance Code.
Director means the director of the department designated by the City Council, City Manager, or City Council or City Manager’s Designee, to enforce and administer this chapter.
Extension of consumer credit has the meaning given that term in Section 393.001 of the Texas Finance Code.
Motor vehicle title loan has the meaning given that term in Section 393.601 of the Texas Finance Code.
Person means any individual, corporation, organization, partnership, association, financial institution, or any other legal entity.
Registrant means a person issued a certificate of registration for a credit access business under this chapter and includes all owners and operators of the credit access business identified in the registration application filed under this chapter.
Sample loan agreement means a written document or documents provided to the consumer that includes every clause contained in the consumer’s specific agreement.
State license means a license to operate a credit access business issued by the Texas Consumer Credit Commissioner under Chapter 393, Subchapter G of the Texas Finance Code.
Sec. 17-73. Violations; Penalty.
(a) A person who violates a provision of this chapter, or who fails to perform an act required of the person by this chapter, commits an offense. A person commits a separate offense for each and every violation relating to an extension of consumer credit, and for each day during which a violation is committed, permitted, or continued.
(b) An offense under this chapter is punishable by a fine of not more than $500.
(c) A culpable mental state is not required for the commission of an offense under this article and need not be proved.
(d) The penalties provided for in Subsection (b) are in addition to any other remedies that the city may have under city ordinances and state law.
Sec. 17-74. Affirmative Defense.
It is an affirmative defense to prosecution under this article that at the time of the alleged offense the person was not required to be licensed by the state as a credit access business under Chapter 393, Subchapter G, of the Texas Finance Code.
Sec. 17-75. Registration Required.
A person commits an offense if the person acts, operates, or conducts businesses as a credit access business without a valid certificate of registration. A certificate of registration is required for each physically separate credit access business.
Sec. 17-76. Registration Application.
(a) To obtain a certificate of registration for a credit access business, a person must submit an application on a form provided for that purpose to the director. The application must contain the following:
(1) The name, street address, mailing address, facsimile number, and telephone number of the applicant.
(2) The business or trade name, street address, mailing address, facsimile number, and telephone number of the credit access business.
(3) The names, street addresses, mailing addresses, and telephone numbers of all owners of the credit access business, and the nature and extent of each person’s interest in the credit access business.
(4) A copy of a current, valid state license held by the credit access business pursuant to Chapter 393, Subchapter G of the Texas Finance Code.
(5) A copy of a current, valid certificate of occupancy showing that the credit access business is in compliance with the City of Grand Prairie Code.
(6) The non-refundable application fee.
(b) An applicant or registrant shall notify the director within 45 days after any material change in the information contained in the application for a certificate of registration, including, but not limited to, any change of address and any change in the status of the state license held by the applicant or registrant.
(c) The non-refundable application fee shall be $50.
Sec. 17-77. Issuance and Display of Certificate of Registration.
(a) The director shall issue to the applicant a certificate of registration upon receiving a completed application under this Article.
(b) A certificate of registration issued under this section must be conspicuously displayed to the public in the credit access business.
Sec. 17-78. Expiration and Renewal of Certificate of Registration.
(a) A certificate of registration expires on the earliest of:
(1) One year after the date of issuance; or
(2) The date of revocation, suspension, surrender, expiration without renewal, or other termination of the registrant’s state license.
(b) A certificate of registration may be renewed by making application in accordance with Section 17-76. A registrant shall apply for renewal at least 30 days before the expiration of the registration. The non-refundable registration renewal fee shall be $50.
Sec. 17-79. Non-transferability.
A certificate of registration for a credit access business is not transferable.
Sec. 17-80. Maintenance of Records.
(a) A credit access business shall maintain a complete set of records of all extensions of consumer credit arranged or obtained by the credit access business, which must include the following information:
(1) The name and address of the consumer.
(2) The principal amount of cash actually advanced.
(3) The length of the extension of consumer credit, including the number of installments
and renewals.
(4) The fees charged by the credit access business to arrange or obtain an extension of
consumer credit; and
(5) The documentation used to establish a consumer’s income under Section 17-81 of this ordinance.
(b) A credit access business shall maintain a copy of each written agreement between the credit access business and a consumer evidencing an extension of a consumer credit (including, but not limited to, any refinancing or renewal granted to the consumer).
(c) The records required to be maintained by a credit access business under this section must be retained for at least three years. The Director or other representative of the City may inspect such records:
1. Upon request, with the consent of a manager, employee, or other authorized representative of the credit access business within fourteen (14) days of the request and at a location within the City of Grand Prairie; or
2. Through a warrant, subpoena, or any other remedy provided by law.
Sec. 17-81. Restriction on Extension of Consumer Credit.
(a) The cash advanced under an extension of consumer credit that a credit access business obtains for a consumer or assists a consumer in obtaining in the form of a deferred presentment transaction may not exceed 20 percent of the consumer’s gross monthly income.
(b) The cash advanced under an extension of consumer credit that a credit access business obtains for a consumer or assists a consumer in obtaining in the form of a motor vehicle title loan may not exceed the lesser of:
(1) Three percent of the consumer’s gross annual income; or
(2) 70 percent of the retail value of the motor vehicle.
(c) A credit access business shall use a paycheck or other documentation establishing income to determine a consumer’s income.
(d) An extension of consumer credit that a credit access business obtains for a consumer or assists a consumer in obtaining and that provides for repayment in installments may not be payable in more than four installments. Proceeds from each installment must be used to repay at least 25 percent of the principal amount of the extension of consumer credit. An extension of consumer credit that provides for repayment in installments may not be refinanced or renewed.
(e) An extension of consumer credit that a credit access business obtains for a consumer or assists a consumer in obtaining and that provides for a single lump sum repayment may not be refinanced or renewed more than three times. Proceeds from each refinancing or renewal must be used to repay at least 25 percent of the principal amount of the original extension of consumer credit.
(f) For purposes of this section, an extension of consumer credit that is made to a consumer within seven days after a previous extension of consumer credit has been paid by the consumer will constitute a refinancing or renewal.
(g) This section does not apply to any actions taken prior to the effective date of this ordinance, which includes but is not limited to, extensions of consumer credit, deferred presentment transactions, motor vehicle title loans, and any other contract or loans that is covered under this ordinance.
Sec. 17-82. Requirement of Consumer Understanding of Agreement.
(a) Every credit access business location must maintain on its premises, to be available for use by consumers, sample loan agreements in the English and Spanish languages.
(b) For every consumer who cannot read, every agreement between the credit access business and a consumer evidencing an extension of consumer credit (including, but not limited to, any refinancing or renewal granted to the consumer) and every disclosure and notice required by law must be read to the consumer in its entirety in the consumer’s language of preference, prior to the consumer’s signature; or in the alternative, have the consumer acknowledge, in writing, that the consumer has five business days from the date of the agreement to cancel the transaction without penalty.
Sec. 17-83. Referral to Consumer Credit Counseling.
A credit access business shall provide a form, to be prescribed by the Director, to each consumer seeking assistance in obtaining an extension of consumer credit which references non-profit agencies that provide financial education and training programs and agencies with cash assistance programs. The form will also contain information regarding extensions of consumer credit, and must include the information required by Section 17-80(a) of this ordinance specific to the loan agreement with the consumer. If the Director has prescribed a form in the consumer’s language of preference, the form must be provided in the consumer’s language of preference.
SECTION 2. This ordinance shall be and is hereby declared to be cumulative of all other ordinances of the City of Grand Prairie, and this ordinance shall not operate to repeal or affect any other ordinance except insofar as the provisions thereof might be inconsistent or in conflict with the provisions of this ordinance, in which event such conflicting provisions, if any, in such other ordinance(s) are hereby repealed.
SECTION 3. If any portion of this ordinance is declared to be invalid or unconstitutional, such holding shall not affect the validity of the remaining portions of this ordinance, and all of provisions shall remain in full force and effect.
SECTION 4. This ordinance shall become effective from and after its passage and publication as provided by law on July 1, 2018.
PASSED AND APPROVED BY THE CITY COUNCIL OF THE CITY OF GRAND PRAIRIE, TEXAS, ON THIS THE 23th DAY OF JANUARY, 2018.