Imprisoned by Payday

The right to not be imprisoned for debt has been guaranteed to Texans since the adoption in 1836 of the Republic of Texas Constitution. But that hasn’t stopped some payday lenders in recent years from illegally filing theft-by-check complaints against borrowers who don’t pay up.

Just threatening criminal charges is against the law, but Texas Appleseed has found rampant abuse of theft-by-check charges in a recent investigation. The nonprofit group filed a complaint in December about the practice with the federal Consumer Financial Protection Bureau, the Federal Trade Commission, the state Office of Consumer Credit Commissioner, and the Texas Attorney General’s office.

According to the Texas Finance Code, a contract between a borrower and a payday lender must state that “a person may not threaten or pursue criminal charges against a consumer related to a check or other debit authorization provided by the consumer as security for a transaction in the absence of forgery, fraud, theft, or other criminal conduct.”

It’s not just a single nonprofit organization that’s worried about the practice. The state consumer credit watchdogs issued an advisory against it in 2013, and last year a major Irving-based lender was ordered to pay $10 million in refunds and penalties because of its use of the practice.

Theft-by-check charges get involved because payday lenders often require borrowers to write one or more post-dated checks to cover what is supposed to be paid back. If a lender tries to cash a check but cannot because of insufficient funds, the lender then files a complaint asking that the borrower be charged with theft by check. District attorney’s offices are not required to accept the cases — in fact, Texas Appleseed and others say it is illegal for them to file such charges — but the group’s investigators found that DAs often do accept them because the fees charged help financially support the offices’ “hot check” divisions.

In its investigation, Texas Appleseed, sampling from just eight counties, found more than 1,500 criminal complaints against borrowers between 2012 and 2014. Those improper complaints represent only a tip of the iceberg, said Ann Baddour, director of fair financial services at Texas Appleseed.

Investigators found that in some courts almost half the theft-by-check cases were based on payday lenders’ complaints. Baddour said that to qualify as a crime, a borrower’s action must constitute fraud, not simply a lack of funds or failure to make loan payments on time.

Southern Methodist University law professor Mary Spector said that true theft by check is much different than just taking out a loan and not being able to repay it.

“Payday lenders have been using the criminal courts as a means to collect debt,” she said. “That kind of debt collection has been made unlawful by the federal Fair Debt Collection Practices Act,” which passed in 1977.

She said the Texas Bill of Rights protects residents from criminal prosecution for debt but that enforcement of the laws on debt collection has been weak in Texas, allowing payday lenders to use unlawful tactics to collect civil debt.

Baddour said such tactics have been a longtime practice of the industry. “This started very soon after the payday lending industry gained its footing,” she said.

The Office of Consumer Credit Commissioner issued an advisory in 2013 saying that payday lenders “should not use a district attorney’s hot-check division simply as a means for collecting debt.”

ACE Cash Express was the Irving-based lender ordered to pay $10 million in refunds and penalties by the federal Consumer Financial Protection Bureau for the practice of criminalizing debt in 2014.

At the time, the Texas Observer quoted CFPB director Richard Cordray as saying that ACE Cash Express used “false threats, intimidation, and harassing calls to bully payday borrowers into a cycle of debt.”

The agency found that the threat of criminal charges was widely used to collect debt, even though the company didn’t file civil suits against customers over non-payment.

ACE Cash Express officials did not return calls or e-mails from Fort Worth Weekly seeking comment for this story.

The Consumer Services Alliance of Texas, which speaks for almost 80 percent of the payday loan industry in this state, issued a statement in response to Texas Appleseed’s investigation and complaint, saying that “best-practice” guidelines prohibit their member businesses from threatening or filing criminal complaints against borrowers and that lenders are subject to expulsion from the group for the practice.

Baddour said that state regulatory agencies have received only about one complaint for every 500 abuses that her organization found. She attributed the discrepancy to the intimidation tactics of the payday industry. Additionally, she said, most customers don’t know that the practice is illegal.

The regulatory agencies don’t grasp how pervasive the practice is, Baddour said.

Payday lenders’ theft-by-check complaints represent a cash stream that prosecutors don’t want to give up, the state consumer credit agency concluded in 2013.

Austin attorney Tracey Whitely represented a client for theft-by-check charges from a payday lender, and in that case the charges were dismissed.
“The payday lenders are using the power of the courts to collect debt,” she said. “A lot of people who are afraid of criminal charges end up paying more in fees.”

Whitely said the practice of criminal prosecution also adds to the cycle of debt being fostered by the payday loan industry. The fees from criminal cases are just piled onto the enormous fees charged by the lenders, she said.

Julie Hillrichs, a spokesperson for the Consumer Services Alliance, argued that those practices are not commonly used by lenders.

“I’m not going to speak [about] individual companies,” she said. “Our companies understand our best practices. There are repercussions for not following the guidelines and all applicable state and federal law. The laws work in Texas and at the federal level. They’ve resulted in complaints. The complaints have been resolved. … I believe that our members unanimously approved the guidelines with the intention of following them in good faith.”

She said there are cases when borrowers do engage in fraud — for instance, by writing a post-dated check for a payday loan and then closing the account before the check is due to be cashed.

Baddour said that more investigation and enforcement of existing laws and policies are needed. She said that justice of the peace courts are a big part of the criminalization of debt problem but are harder to investigate.

She urged consumers to be aware and to fight back against the practice. Borrowers, she said, can go to the Texas Fair Lending Alliance website (texasfairlending.org) to arm themselves with the information and tools to make informed decisions about borrowing money.

“It’s a place where people can go to obtain help to fight against being wrongly threatened,” Baddour said. “I think what’s so insidious about this practice is that it’s using our faith in the criminal justice system to wrongfully collect a debt.”