During the holidays, consumer advocates worry that cash-strapped borrowers will turn to payday lenders and dig themselves into debt with high-interest loans. In Texas, it’s not the only finance charges that are raising alarms but threats of jail time.
Payday lenders in the Lone Star State have filed at least 1,500 criminal complaints against borrowers for bad check writing and theft by check, according to a new investigation by Texas Appleseed, a nonprofit that promotes social and economic justice.
The data “documents an ongoing trend of unlawful use of criminal charges by payday loan businesses to collect debts,” states the complaint that Texas Appleseed sent this week to federal and state regulators, including the U.S. Consumer Financial Protection Bureau and the Texas Attorney General’s office. In one court alone, researchers discovered “arrest warrants were issued in 42 percent of the bad check cases brought based on payday loan business complaints, and jail time or jail credit applied in 5.6 percent of the cases,” the complaint says.
“What we want to see is further investigation,” Ann Baddour, director of Texas Appleseed’s fair financial services program, told International Business Times. “We feel very confident that the data we found is indicative of a real problem,” she said.
In a traditional payday loan, a customer writes a post-dated check for the amount borrowed, plus the finance charge for the loan. “The law is fairly clear on the criminal side that if a post-dated check comes back unpaid, that doesn’t meet the standard for a bad check or theft-by-check,” Baddour says.
In response to the complaint, the Consumer Service Alliance of Texas (CSAT), a trade association for short-term lenders, issued a statement, reiterating the organization's "best practices" guidelines, which prohibit members from threatening customers with criminal action "in the absence of forgery, fraud, theft or other criminal conduct." According to a copy of the statement emailed to IBTimes, “Every CSAT member company understands their membership in the trade association may be terminated if their organization chooses not to comply with the best practices, in addition to all applicable state and federal laws and regulations.”
State legislators addressed the issue with a law that took effect in 2012. Unless payday lenders can clearly establish fraud, “they may not pursue criminal charges for nonpayment,” according to the Texas Appleseed complaint.
Still, a July 2013 investigation by the Texas Observer turned up 1,700 cases of payday lenders lodging criminal complaints against borrowers in three cities, leading state regulators to undertake their own inquiry and to warn lenders against the practice.
The Texas Appleseed findings stem from records requests to 21 county and district attorneys across the state, along with a review of information from four justice courts that handle lower-level criminal offenses. The report covers the period right after the new law took effect, from January 1, 2012 through the spring of 2014. Among the approximately 1,500 criminal cases brought by 13 payday lenders that the organization identified, “nothing that we saw documented evidence of fraud,” Baddour says.
The state's protections against debtors' prisons date back to when Texas broke away from Mexico and won independence. The 1836 Republic of Texas Constitution states, "No person shall be imprisoned for debt in consequence of inability to pay." In modern times, the mandate is spelled out in the state's Bill of Rights as: “No person shall ever be imprisoned for debt.”
Lawful debt collection tactics include taking civil court action against a debtor. “When someone in a desperate situation can’t pay, and then you threaten them with criminal action, it’s unjust,” Baddour says. Texas Appleseed requests that regulators remove “any wrongful criminal convictions” from borrowers’ criminal records, and “ensure restitution for individuals who paid money or served jail time” as a result of wrongful criminal complaints.
The Consumer Financial Protection Bureau is expected to propose new federal regulations on both payday lending and debt collection. In July, the agency reached a $10 million settlement with Texas payday lender ACE Cash Express over the use of “illegal debt collection tactics,” including threats of criminal prosecution.
Meanwhile, approximately 20 Texas cities have passed local ordinances to regulate payday lending practices in their communities.