History of Payday and Auto Title Lending in Texas
As recently as the 1990’s, current payday and auto title business practices were illegal in Texas. In 2001, the Texas Legislature adopted standards for payday lending. Since the 2001 legislative action, payday and auto title businesses have found ways to get around state interest and fee limitations. The result has been an explosion of locations of these high-cost loan businesses. In 2004, there were 1,300 storefronts in Texas. Today, there are over 2,500 storefronts statewide—more locations than McDonalds and Whataburger combined.
In short, payday and auto title businesses avoid Texas’ usury law by exploiting a legal loophole that allows them to get around the Texas Constitution’s 10% usury cap. Payday and auto title storefronts register as Credit Access Businesses (CAB) under the Credit Services Organizations Act and collect high fees—upwards of 23% of the loan principal amount in interest and fees every two-weeks to one-month—while a third party lender receives interest at or below 10%.
The CSO Lending Model: Evasion of Texas Usury Law
Beginning in the 1990s, a handful of businesses claimed regulation under the Texas Credit Services Organizations (CSO) Act, an Act passed in 1987 to protect consumers against abusive credit repair businesses. The CSO Act includes a provision that describes “obtaining an extension of consumer credit for a consumer” as a credit services organization activity and a handful of businesses used this provision to engage in high-cost lending in Texas.
In 2004, the issue came to a head when the U.S. Fifth Circuit Court of Appeals ruled in Lovick v. Ritemoney Ltd. that the fees charged by Texas CSOs to obtain consumer credit for customers are not attributable to interest when determining compliance with usury laws. A 2006 letter from the Texas Attorney General’s Office regarding the legality of the CSO lending model found the model legal on its face and referred any discussion of the merits of the model as a matter of public policy that was best left to state lawmakers.
The Fifth Circuit decision, in combination with the Attorney General letter, led to an explosion of CSO registrations by payday and auto title companies in Texas. In 2004, there were 250 registered CSO locations; and in 2011, there were over 3,400 registered CSO locations.
Source: Texas Appleseed analysis of data provided by the Texas Secretary of State.
During this same time period, local charities and faith-based groups reported a growing number of requests for assistance from Texas families indebted to payday and auto title lenders. A 2010 survey in Texas by Catholic Charities found that nearly 20% of their cash assistance was going to families in financial stress due to payday or auto title loan debt. In response, some Texas cities adopted zoning ordinances to stem the expansion of these high-cost lenders and resolutions asking the state legislature to take action to limit rate and fee charges for payday and auto title loans.
Texas Legislative Sessions, 2011-2015
During the 2011 Texas legislative session, there was a groundswell of popular and bipartisan support to reform the payday and auto title industry. Major state newspapers published editorials in support of reform. Texas Faith for Fair Lending and members of the Texas Fair Lending Alliance helped pass two bills aimed at reform. The bipartisan effort improved the regulatory situation in Texas, but did not address the exorbitant fees and faulty loan structure that lead to a cycle of debt. The new laws were small steps forward for consumers: one bill requires detailed cost disclosures and the other establishes licensing under the CSO Act. The licensing bill also calls for data collection to better understand industry operations.
During the 2013 legislative session, many bills, including SB 1247 were introduced, however, none reached the the Senate or House chambers. In 2015, more than 40 bills were filed to address the problems of payday and auto title lending. Only HB 411, which addressed telemarketing tactics imposed by payday and auto title lending businesses, made it out of committee. Nonetheless, it died in the Senate. None of the other 40+ bills made it out of committee.
Reform Efforts and Local Action
Since the 2011, 31 cities, including Austin, Dallas, El Paso, and San Antonio, passed ordinances aimed at ending the cycle of debt. The ordinances limit renewals of payday and auto title loans, require each payment to reduce the loan principal by at least 25 percent, and limit loans based on borrowers’ ability to pay. 16 cities across the state have passed zoning ordinances aimed at controlling the growth of payday and auto title storefronts. In addition, other cities such as Bryan, College Station, Sachse, Lubbock, Midland, and Brownsville, have passed resolutions asking for state lawmakers to do more to regulate payday and auto title lenders.
The newly established Consumer Financial Protection Bureau has the authority to regulate consumer lending across the country. While regulating this market is a top priority for the Bureau, it just started conducting research, including talking to consumer and industry representatives. Texas should not wait for Washington to take action. We need a Texas solution.
The time is now for change in Texas—cities have taken a stand and consumers across the state agree that payday and auto title loans are defective products that are hurting our communities.