If you want to fix something in Texas, go to Washington.

At least that’s the case with payday loans, the practice of luring the working poor into a two-week loan that lasts five months and costs an arm and a leg.

Payday loans are marketed as a short term solution. But 4 out of 5 are renewed rather than reimbursed as planned.

In Texas, an average payday loan of $ 300 generates $ 701 in fees, the highest surcharges in the country, according to the Pew Charitable Trusts. About 1.5 million Texans use payday loans each year, but Austin lawmakers have repeatedly failed to cap interest rates or set other limits.

This train of pro-business sauce may be coming to an end.

Last week, the nation’s leading consumer watchdog cracked down on Irving’s Ace Cash Express, which operates 1,500 convenience stores in 36 states. Ace will pay $ 10 million in fines and restitution after the agency uncovers nasty collection tactics.

While regulators have documented that borrowers are harassed and intimidated, they have also focused on the industry’s fundamental default: a business model that pushes customers to renew loans they can’t afford.

Ace “tricked payday borrowers into a cycle of debt” and pushed them into “debt traps,” said Richard Cordray, director of the Consumer Financial Protection Bureau in Washington.

“These types of predatory tactics are appalling,” Cordray said.

For years advocates across the country have described payday loans in similar terms. But it was the first time the bureau had applied the notion of a “debt cycle” to an enforcement measure.

This is significant, as the agency will be drafting new rules to govern the troubleshooting industry. Currently, the business is largely regulated by state laws, which vary widely. Fourteen states and Washington ban payday loan stores, and nine states limit fees or other practices, Pew said.

Texas, still proud of its light weight when it comes to regulation, is one of seven states without a price cap, according to Pew. This reverberates, as many Texans do not have a bank account.

Only Mississippi has a higher proportion of residents without a bank account and caps wage rates. The average cost of a payday loan in Mississippi is half the price in Texas, according to Pew.

Abusive practice?

Payday lenders know that most borrowers will renew their loans just because they can’t afford to pay them off, said Nick Bourke, who leads Pew’s research on small loans.

“Their business model is built on this phenomenon,” Bourke said. “This is what needs to change.

The consumer protection agency demonstrates that such loans represent an abusive practice, he said. This is described in the consent agreement with Ace, although Ace does not admit or deny any wrongdoing.

In a statement last week, Ace listed the ways he has improved his collections in recent years. He also described policies to prevent defaulting borrowers from taking out new loans and ways to repay outstanding balances.

CEO Jay Shipowitz said the company received 40 million customer visits in the past 12 months. Industry players often say they are meeting huge demand. And while loans can be expensive, bad checks and disconnected utilities cost more, they say.

“It’s easy for the government to just say ‘no’ to payday loans,” said William Isaac, former chairman of the Federal Deposit Insurance Corp. and consultant to the payday lending industry.

But “regulators must reconsider their decision before destroying a critical source of credit for families and the economy as a whole,” Isaac wrote in an op-ed in American banker in February.

He said most payday borrowers understood the terms and were realistic about the time frame and cost of repayment. In a Pew survey, about 3 in 4 payday borrowers said they wanted more time to repay and more product regulation.

Payment vs income

The average amount owed on a retail store payday loan is $ 430, Pew said. That’s more than a third of a bi-weekly salary for payday clients, whose median annual income is $ 31,000.

They can’t pay back the loan and cover food, utilities, and the like. So they renew the loan over and over again.

Another approach, proposed by Pew, is to limit the monthly payment to 5% of the monthly income before taxes. Then spread the payments evenly over several months so that the loan is paid off.

Colorado reformed its payroll laws in 2010, and Bourke cited its success at a Senate hearing in March. Half the stores are still open and borrowers are saving $ 200 on a typical loan, he said.

Loan repayments are much more affordable: 4% of a salary today versus 38% previously, Bourke said. Defaults are down 30% and credit counselors are reporting fewer complaints.

In March, Cordray recognized the high demand for payday loans and their importance.

“But we also need to recognize that loan products that routinely lead consumers into debt traps should not have a place in their lives,” he said.

Follow Mitchell Schnurman on Twitter at @mitchschnurman.