History of Payday and Auto Title Lending in Texas
As recently as the 1990s, 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 nearly 2,000 storefronts statewide — more than all of the McDonald's locations in Texas.
In short, payday and auto title businesses avoid the Texas Constitution’s 10% usury cap — the maximum legal interest rate for loans — by exploiting a loophole. 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 fees every two weeks to one month — while a third party lender receives interest at or below 10%.
The CSO/CAB Business Model
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 some businesses used this provision to engage in predatory, 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.
Growth of Texas CSO Storefronts: 2004-2011
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 submitted resolutions asking the state legislature to take action to limit rate and fee charges for payday and auto title loans.
Texas Legislative Sessions, 2011-2021
During the 2011 Texas legislative session, there was a groundswell of popular and bipartisan support to reform the payday and auto title industry. Many 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 the bills 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 (HB 2592) requires detailed cost disclosures and the other (HB 2594) 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 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, passed out of the Texas House of Representatives, but it failed to pass in the Senate. None of the other 40+ bills made it out of committee.
Since 2015, many bills have been filed to reform payday and auto title lending in Texas. None have been successful to date.
Reform Efforts and Local Action
Since 2011, 46 cities, including Austin, Amarillo, Dallas, El Paso, Fort Worth, Longview, Midland, and San Antonio, have passed ordinances aimed at ending the cycle of debt. The ordinances create these standards:
Limit the size of payday and auto title loans based on borrower income,
Limit renewals of payday and auto title loans, and
Require each payment to reduce the loan principal by at least 25%.
At least 16 cities across the state have passed zoning ordinances aimed at controlling the growth of payday and auto title storefronts.
A recent study analyzing the impact on borrowers of the city ordinance found that the ordinances improved outcomes for borrowers without limiting access to credit. Using state and U.S. Census data from 2012 to 2017, the study found statistically significant reductions in the number of new loans, refinances, and vehicle repossessions, as well as the dollar amount of new loans, refinances, and fees, where ordinances were in place. Based on the analysis, if all of Texas had been under the unified ordinance, there would have been 7 fewer vehicle repossessions by auto title loan businesses per 10,000 adults and $129,914 less in fees paid per 10,000 adults. Expanded statewide, the ordinances would result in substantial savings for Texans.
2019 Texas AG Opinion Opens Yet Another Predatory Lending Loophole
In November 2019, the Texas Attorney General issued an opinion interpreting state law that opens a new loophole to skirt the few state and local protections that apply to high-cost loans arranged under the Credit Services Organizations Act, once again leaving vulnerable Texans at the mercy of predatory market practices.