Leonard Abbott of San Marcos had heard of the dangers of payday loans — the small-dollar, high-interest credit that can quickly trap borrowers in a morass of debt. But when unexpected medical bills blew a hole in his monthly budget last year, he felt he had nowhere else to turn. He took out a $500 loan, expecting to pay it back in full in two weeks. When he couldn’t, he sought more loans, until about a third of his $1,700 monthly take-home pay was going toward paying interest and fees alone.

“The second loan that I got was to help pay the first one, and it kind of just snowballed,” said Abbott, a 53-year-old Department of Public Safety security officer at the state Capitol. “One thing that I didn’t realize is, it doesn’t matter how many payday loans you have, you still qualify for more.”

Regulations proposed earlier this month by the federal Consumer Financial Protection Bureau might have changed Abbott's experience with payday loans. The rules, which cover payday loans and auto title loans in which a car title is put up as collateral, would require lenders ensure a borrower can afford to pay for a new loan and still afford existing loan payments and their basic living expenses each month. They would limit the number of times a loan can be extended and require that each monthly payment make progress toward paying down the principal.

Abbott's experience is especially common in Texas, where 8 percent of people have used payday loans, according to the Pew Safe Small-Dollar Loans Research Project, compared to the national usage rate of 5.5 percent. The Center for Responsible Lending, a group that fights predatory lending practices nationally, says that annual interest rates on payday loans in Texas are among the highest in the nation at 662 percent, second only to Ohio.

“We call ourselves the wild, wild West of payday and auto title lending,” said Brett Merfish, a staff attorney at Texas Appleseed, a nonprofit that works on economic and social justice issues, including advocating for stricter regulations on payday lending. “This market has needed to be reined in, and we think that these rules are a good step in that direction.”

But the regulations likely won’t come into full effect until 2018 at the earliest. The bureau will accept public comments on the 1,341-page rule until mid-September, and then needs time to revise and publish the final regulations. Lenders will get a 15-month grace period to comply with the rules, according to bureau spokesperson Sam Gilford.

Until then, the battle to regulate short-term lenders will play out at the local and state level in Texas, as cities pass rules of their own, faith groups and consumer advocates call on the Legislature to enact restrictions on the state’s $5.8 billion payday and auto title lending industry and supporters of the industry maintain it is the best credit option for low-income people who need small loans.

“The regulations proposed probably will stop Americans in financial distress from obtaining payday loans,” said Kathleen Hunker, senior policy analyst at the Texas Public Policy Foundation. “But if consumers need access to that capital and there’s no good options available, they’ll fall further and further into debt.”

City regulations

Currently, the strongest restrictions on payday and auto title lending in the state are in place at the city level. The Texas Constitution prevents lenders from charging interest rates above 10 percent, but payday and auto-title lenders get around that cap as “credit access businesses,” which technically broker loans between consumers and third-party lenders. Their fees are unregulated.

Bennett Sandlin, executive director of the Texas Municipal League, which has encouraged cities seeking restrictions on payday lending to pass a so-called "unified ordinance" to avoid a patchwork of different regulations, said cities have been forced to step in because of inaction at the state level.

According to the Texas Municipal League, 35 cities have now passed ordinances similar to the proposed federal rule in that they require lenders, including credit access businesses, to verify a borrower’s monthly income and limit the number of times a loan can be refinanced. The ordinances also cap the size of a loan at 20 percent of the borrower's monthly income, or for auto title loans, 70 percent of the retail value of their car. According to Texas Appleseed, the ordinances have contributed to a decline in the number of licensed payday lending locations in the state by 24 percent, from 3,336 in 2013 to 2,532 in 2015.

The city ordinances, which cover nearly 10 million Texans, including those who live in Austin, Houston, Dallas and San Antonio, seem to be working where they are in effect. In Amarillo and El Paso, for example, Texas Appleseed found that the ordinances led to a significant drop in the number of vehicle repossessions and smaller declines in the value of new loans. San Marcos, where Leonard Abbott took out his loans, has not passed a unified ordinance.

But the ordinances can also have consequences that extend beyond the cities that pass them.

Brian Baker, the owner of Check ‘N’ Title, a payday and auto title lender with nine locations in the Dallas area, said the city’s ordinance has not seriously affected his business, and if it did, he could simply set up shop in a municipality without regulations.

“Even if you wanted to go out of that city and go to a bordering city, you could do that,” Baker said.

Moreover, interest rate caps, which Texas Appleseed says is the most effective means of curtailing predatory lending, can only be set by states. Nationally, 14 states have effectively eliminated payday lending by capping interest rates at 36 percent, according to the Center for Responsible Lending.

“Mayors don’t wake up in the morning and go, ‘Gee, I want to regulate financial transactions,” Sandlin said. “But they’ve had to do so because the state has been asleep at the switch in attacking this usury loophole.”

At the Texas Capitol

In the 2015 legislative session, several bills that would have imposed more stringent regulations on payday lenders failed to pass. One made it out of committee but was never brought up for a floor vote in the Senate, while the other two were never voted on in their committees.

State Rep. Tom Craddick, R-Midland, proposed HB 3047, which would have made the requirements of the city ordinances state law. The bill died in committee, but Craddick said he plans to reintroduce his legislation in the next session. He believes that a regulatory bill would pass easily if it could make it to a floor vote.

“How can you go home and campaign and say that you support up to 500 percent fees and interest on a loan?” said Craddick, a former House speaker. “That’s pretty tough.”

While the federal rules have spotlighted the issue, Craddick worries the long timeline before they come into effect could create an excuse for inaction.

In a statement, state Sen. Kelly Hancock, R-North Richland Hills, chairman of the Senate Business and Commerce Committee, said the federal rule would need to be finalized before “we'll have a better idea whether any adjustments need to be made at the state level."

Rep. Tan Parker, R-Flower Mound, chairman of the House Committee on Investments and Financial Services, called the rule “a clear federal overreach.”

“Texas, like all other states, is capable of governing itself and its people without the unnecessary encroachment of federal bureaucracy and rulemaking,” Parker said in a statement.

Baker, the owner of Check 'N' Title, said he plans to wait and see how the federal regulations will play out before making any conclusions about how they could affect his business. He defended the payday lending model and the services offered by his company, where a recent auto title loan came with a 211 percent annual percentage rate.

"I know that we get a bad rap," he said. "I know that our interest rate is not the greatest. But the fact of the matter is that we’re dealing with people that have exhausted everywhere else."

While government regulations are in flux, Texas nonprofit and faith-based groups have stepped up their efforts to create affordable small-dollar loan alternatives to payday and auto title loans. Business and Community Lenders of Texas launched a program in Dallas in 2011 that allows employees of participating businesses to access small loans at an interest rate of 18 percent; the program has since expanded to cover 39,000 Texans. Raquel Valdez, chief operating officer, projects that 50,000 people will be eligible in the next two years.

Growing debt

For Leonard Abbott, who started working at the Capitol four years ago after a long trucking career, payday lending seemed like his only option when he suddenly couldn't make ends meet. He felt too ashamed to ask his two adult children for help, and the loans piled up.

"I’ve always been against those things, the payday loans," Abbott said. "I knew about them ahead of time and I knew it’s easy to get caught up in their trap, but again, at the time I just felt like I didn’t have any other alternative options."

Eventually, a friend told him about a program run by the Society of St. Vincent de Paul for the Diocesan Council of Austin. The group’s Predatory Loan Conversion Program, launched in 2014, works with a credit union to convert high-interest loans into secured credit with lower rates. So far, the program has helped 56 people convert 88 loans. In May, Abbott’s four payday loans — totaling nearly $2,500 — were converted into a loan from the Randolph-Brooks Federal Credit Union. His interest payments were reduced from $450 monthly to $30.50 in total. He now has 12 months to pay back his loan.

On a recent Saturday afternoon, Abbott took a break from the overtime shift he was was working at the Capitol. Walking across the grounds, he explained which offices and meeting rooms lay below his feet, in the underground Capitol Extension. In the interim period between legislative sessions, he greets Capitol visitors and checks their bags, but he prefers the busy times when the Legislature is in session.

"My favorite part about working at the Capitol is seeing the representatives coming in, and also just to see Texas law working at its best," he said.

Abbott will be closely watching the Legislature's next session when it starts in January.

“I am hoping and will be praying that they will look at legislation to regulate this,” Abbott said.

Disclosure: Texas Appleseed, the Texas Municipal League and the Texas Public Policy Foundation have been financial supporters of The Texas Tribune. A complete list of Tribune donors and sponsors can be viewed here.