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KERA's One Crisis Away project focuses on North Texans living on the financial edge.

Report: Texas Payday & Auto-Title Lenders Got Over $45 Million In Federal Pandemic Aid

A yellow and red storefront for LoanStar Title Loans in Grand Prairie. A sign in front of the store advertises "cash loans on car titles."
Christopher Connelly
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KERA News
LoanStar Title Loans has dozens of storefronts like this one, in Grand Prairie, where a $600 loan will cost more than $1,600 to pay back. LoanStar's parent company, Wellshire Financial Services, took out a $25 million loan as part of a federal pandemic aid program for small businesses. The loan carries a 3% interest rate, even as the company offers loans with more than 300% annual rates.

Lenders that charge borrowers annualized rates up to 600% took advantage of taxpayer-funded loans at 1% or 3% through federal pandemic relief programs.

According to a new report from the consumer watchdog group Texas Appleseed, companies that sell Texans short-term loans with huge fees borrowed more than $45 million in federal pandemic business loans through the Paycheck Protection Program (PPP) and the Main Street Lending Program.

The programs, authorized by Congress last March as part of the CARES Act, were intended to help stabilize small businesses as the coronavirus sent the economy into a tailspin.

Payday and auto-title lenders have the opposite effect on borrowers, said Ann Baddour, director of Texas Appleseed’s Fair Financial Services Project. They often trap their mostly low-income clientele in debt that can take months or years to pull out of.

“The CARES Act was not adopted to subsidize predatory lending businesses. It was adopted to help families and small businesses weather this incredible financial crisis,” Baddour said.

The Small Business Administration originally excluded lenders in their list of businesses that were ineligible for the federal pandemic business loans — a list that included strip clubs and other adult entertainment companies, as well as lobbyists and companies with “pyramid sale distribution plans” — but those exclusions were immediately challenged in court.

“Why should taxpayers…subsidize these businesses that are lending at exorbitant prices, and that so often undermine the financial well-being of families?” said Baddour.

A PPP Payday For Payday Lenders

Fifteen companies that operate in Texas selling small, short-term loans with extremely high fees borrowed a combined $20 million under the PPP last year.

Those loans are forgivable if companies comply with a handful of conditions, including that they keep employees on the payroll for a couple months after receiving the loans. Otherwise, PPP loans carry a 1% interest rate.

Texas payday and title loan operations’ PPP loans were also larger, on average, than the typical Texas small business, according to the report. And most received their loans quickly after the program was authorized, at the same time that many small businesses struggled to access the funds, particularly Black- and Latino-owned firms.

“This was a pretty concerning finding,” Baddour said.

There is no cap on fees charged by companies that broker payday and title loans for Texas borrowers, and it’s not uncommon for payday loans to carry fees more than 500% the annual percentage rate (APR). For comparison, the average interest rate for a new credit card is around 18%, according to WalletHub.

The company LoanMe received more than $4.8 million in PPP loans, according to the Texas Appleseed report. If the loans to LoanMe aren’t forgiven entirely, the company will pay an interest rate of 1%.

If a borrower in Texas takes out a $600 multi-payment payday loan from the company LoanMe, they’ll pay nearly $1,000 in fees and interest. That means it takes $1,600 to pay back a $600 loan, working out to an APRof 510%.

LoanMe, which is based in Anaheim, Calif., did not reply to KERA’s request for comment.

The high cost of small, short-term loans from payday and title loan companies balloon when borrowers aren’t able to pay back the loan on time.

According to state-mandated disclosure documents, about 3 of every 10 LoanMe customers don’t pay off those $600 payday loans as planned, launching another round of fees and interest when the loans are refinanced.

Big yellow letters mounted to the wall inside this LoanStar Title Loans storefront say "cash loans" and a sign propped against the doorway reads, in bright red letters, "We'll pay off other title loans."
Christopher Connelly
Just over half of the customers who took out a $600 multi-payment auto-title loan from LoanStar pay the loan on time as scheduled. The loan includes more than $1,000 in fees and interest. The rest of the borrowers renewed the loan at least once, adding costs. A borrower who misses a payment or pays late could lose their car.

A Title Loan Company With Ties To Trump

The largest loan detailed in the report went to Wellshire Financial Services, which operates more than a hundred LoanStar Title Loans locations in Texas. A sign in the company’s Grand Prairie location boasts a “special offer”: Taking out a title loan to pay off another title loan.

The Georgia-based company received a $25 million loan under the Federal Reserve’s Main Street Lending Program. The Washington Post reports that the company, run by Trump donor Rod Aycox, plans to use the loan to expand its title loan empire.

The company did not respond to KERA’s request for comment on this story.

According to LoanStar’s disclosure forms, a borrower will have to pay $1628.82 to pay off a $600 loan. That’s a yearly rate of nearly 383%.

The federal government’s $25 million loan to LoanStar’s parent company has a 3% interest rate.

Though title loans are often less expensive than payday loans, they also carry a distinctive risk: The loan is secured by a vehicle title, so if the borrower misses a payment or makes a late payment, LoanStar can take their car or truck.

In the first three months of 2020, more than 13,000 Texans had their vehicles repossessed after falling behind on title loans.

A ‘Concerning’ Business Model

Texas stands out for its unique approach to short-term lending. The payday and title loan storefronts, like LoanStar, are registered as “credit access businesses” that broker title loans financed by outside lenders, rather than making the loans directly. The setup allows companies to get around a state cap on interest by charging unlimited fees.

In 2019, fees paid by Texans topped $2 billion, up from $1.2 billion in fees paid in 2012.

Ann Baddour from Texas Appleseed says the companies’ business models rely on people struggling to make ends meet and in need of quick cash to avert a potential crisis.

A review of business activity reports from the Texas Office of Consumer Credit Commissioner shows that title and payday lenders saw business volume decline at the beginning of the pandemic, as federal stimulus checks, emergency food and rental assistance and robust unemployment benefits acted as a cash infusion that helped stabilize many low-income families.

As the summer ended and federal assistance dried up, leaving hard-hit families with fewer resources, the businesses bounced back. Third-quarter data, the latest available, showed payday and vehicle-title loans returned nearly to pre-pandemic levels.

“That’s pretty concerning because we’ve seen that families continue to apply for unemployment,” Baddour said. “And as families get more desperate, to the extent that they end up resorting to these kinds of loans, it’ll only make their situation worse.”

It’s a devastating debt spiral that state lawmakers could interrupt by following the lead of several states that have acted to rein in predatory lending practices and capped fees and interest rates charged on the loans.

The GOP-led legislature hasn’t shown much interest in doing that in previous sessions, but Baddour said she hopes the pandemic’s spotlight on financial instability might move lawmakers to act.

Got a tip? Christopher Connelly is KERA's One Crisis Away Reporter, exploring life on the financial edge. Email Christopher at cconnelly@kera.org.You can follow Christopher on Twitter @hithisischris.

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