Arresting people -- or threatening to do so -- over unpaid debts has been illegal in Texas for years now. Yet, that hasn't stopped payday lenders from using the criminal justice system to go after more than 1,500 borrowers in the state.
Payday lenders are routinely turning to the courts seeking criminal charges when borrowers don't have the funds to repay their loans on time, a report from Texas Appleseed found. Such charges can lead to arrest or even jail time if the courts decide to pursue a case.
"In addition to their outrageous rates and lending practices, payday loan businesses are illegally using the criminal justice system to coerce repayment from borrowers," said Ann Baddour, director of the Fair Financial Services Project at Texas Appleseed.
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%. In Collin County, Texas, for example, 204 people paid a collective $131,836 after criminal complaints were filed, the report found.
Appleseed analyzed more than 1,500 criminal complaints filed by more than a dozen payday lenders between 2012 and mid-2014. Yet it says these are "just the tip of the iceberg" since it only examined public records from eight of the state's 254 counties.
In one Harris County court precinct, for example, nearly half of the 107 criminal complaints resulted in the issuance of arrest warrants and six people served jail time because they could not afford or did not want to pay the court fines that were tacked on top of what was already owed. This is despite the fact that the state's constitution states that "no person shall ever be imprisoned for debt."
Payday lenders have been able to get around the laws, however, by using the state's "bad check" and "theft by check" laws and arguing that delinquent borrowers are committing fraud or theft.
Here's how it works: payday loan borrowers typically have to provide a post-dated check or future authorization to debit their bank account in order to secure a loan. When the loan's term ends (typically after a few weeks), the borrower can allow the check or debit to go through or roll over the loan into a new one, which leads to additional finance charges.
In cases where the borrower does not roll over the loan or have enough money in the bank to pay off the balance, lenders then cash that post-dated check or debit their account for the amount they are owed. When the check bounces, or the account comes back with insufficient funds, the lender files a criminal complaint invoking the bad check laws, which make it a crime to buy goods or services with a check that the consumers knows will bounce.
In many cases, the courts as well as district and county attorneys send out letters to the borrowers warning that they could face arrest if they don't immediately pay their debt.
Some courts are rubber stamping these complaints even though state laws state that bouncing a check that is intended to repay a payday loan is not enough to pursue criminal charges.
Texas legal aid attorney Tracey Whitley was able to get bad check charges dropped against one of her clients last year. But she said that without legal representation, many low-income borrowers may plead guilty and pay the additional fines and fees without realizing that the charges never should have been filed in the first place.
"It makes it very convenient for the payday lender," she said. "They are successfully using the criminal courts to collect their private debts."
Appleseed argues that Texas courts and prosecutors should uniformly reject these complaints unless there is additional proof of fraud.
Some payday lenders are even trying to get around those laws by requiring borrowers to date their checks for the initial transaction date, Appleseed found.
Bad check laws are designed to penalize someone who knowingly uses an empty bank account to "buy a TV or groceries," Baddour said. "It's not designed as a debt collection tool for credit."
PLS Loan Store and Cash Zone, the two lenders responsible for the majority of the complaints cited by Appleseed, did not respond to requests for comment.
Texas Appleseed is calling on state and federal regulators, including the Consumer Financial Protection Bureau, to better enforce laws prohibiting these practices.
The CFPB would not confirm whether it was investigating the issue, but said in a statement that "consumers should not be subjected to illegal threats when they are struggling to pay their bills, and lenders should not expect to break the law without consequences."