Texas Payday Lenders Use Criminal Courts to Collect on Loans

Texans who can’t afford to pay back a high-interest payday loan may be wishing they had a get-out-of-jail-free card.

An analysis by nonprofit consumer advocate Texas Appleseed found that payday loan companies have improperly used the Texas criminal court system to try to collect debts owed by more than 1,500 borrowers, even going as far as putting some delinquent borrowers behind bars.

Although Texas law bans using criminal courts to collect on debts, Texas Appleseed found that payday loan businesses are circumventing state law and instead “using the state’s ‘bad check’ and ‘theft by check’ laws and arguing that delinquent borrowers are committing fraud or theft,” CNN Money reports.

Typically, a payday loan works like this: A customer receives a loan, then immediately writes a check to the payday lender for the loan amount, plus a finance fee. The check is postdated for the loan’s due date. If there’s not enough money in the customer’s account to cover the loan and finance charge, the check bounces.

Texas Appleseed said that still doesn’t give the payday loan company the legal right to pursue the unpaid debt through the criminal court system.

“The law is fairly clear on the criminal side that if a postdated check comes back unpaid, that doesn’t meet the standard for a bad check or theft-by-check,” Ann Baddour, director of Texas Appleseed’s fair financial services program, told International Business Times.

Texas Appleseed detailed its concerns in a recent letter to the Consumer Financial Protection Bureau:

Payday loan businesses (CABs) filing criminal charges erode the quality, consistency, and authority of the criminal justice system by brazenly violating state and federal laws. Unlawful use of state prosecutors and courts as de facto debt collection agencies undermines the integrity of these agencies. These outcomes are inconsistent with intent of consumer protection laws and the intent of Texas criminal laws.

Texas Appleseed’s analysis revealed that one justice court in Texas issued arrest warrants in 42 percent of the debt cases brought by payday loan businesses. CNN Money said:

While only a small fraction of these borrowers actually end up serving jail time, Appleseed said that threats of criminal charges are an effective way to force debtors to repay the loans, which can carry effective APRs of more than 500 percent. In Collin County, Texas, for example, 204 people paid a collective $131,836 after criminal complaints were filed, the report found.

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