For years, Texas credit services organizations have been brokering payday and title loans under what’s termed the CSO model. Relying on a case called Lovick v. Ritemoney, 378 F.3d 433 (2004), payday lenders have generally avoided Texas’s maximum usury rates by establishing two companies – a lending company and a credit services organization. The lending company makes a loan at an interest rate of 10% or less. Because the interest rate on the loan is 10% or less, the loan is not subject to the onerous licensing requirements and substantive limitations under Chapter 342 of the Texas Finance Code, which applies to consumer-purpose loans with an interest rate in excess of 10%. The other company registers as a CSO, brokers the loan on behalf of the borrower stating that the broker can get a person a loan of 10% or less, and charges a broker fee. For federal Truth in Lending purposes, the broker fee is a finance charge, making the annual percentage rate exceed the rates allowed under Texas law (typically 18%, slightly higher for small loans). However, for purposes of Texas usury, pursuant to the Ritemoney case, the broker fee is not considered interest, but a third-party fee for services actually rendered that are not attributable to the lender’s overhead expenses.
In recent years, several states have passed legislation regulating payday loans and motor vehicle title loans in response to consumer complaints about high fees and other abuses. Consumer groups, such as Texas Appleseed, and the Texas Office of the Consumer Credit Commissioner, which regulates consumer lenders, believe the CSO payday lending model is a loophole in Texas law that needs to be closed. To that end, the consumer groups, with the help of some consumer-friendly legislators, have attempted to get legislation passed in the past several legislative sessions to limit Texas payday lending based upon the CSO model.
The Texas Legislature has consistently rejected legislation aimed at restricting payday loans or motor vehicle title loans. In 2011, the Legislature failed to pass House Bill 2593, which would have restricted the amount financed based on the consumer’s income, limited the number of times loans could be refinanced or renewed, and established an extended repayment plan upon a consumer’s default.
The Texas Legislature did not summarily reject all payday loan and motor vehicle title loan legislation. Legislators passed laws limiting, but not destroying, Texas’s CSO model. House Bills 2592 and 2594, effective January 1, 2012, regulate credit services organizations that obtain for a consumer, or assist a consumer in obtaining, a payday loan or a motor vehicle title loan, calling those organizations credit access businesses. Texas will require those credit access businesses to provide certain disclosures to consumers and to obtain a license. In addition, credit access businesses will be subject to substantive requirements and the supervision of the Texas Office of the Consumer Credit Commissioner.
Increased Consumer Disclosures
The legislation requires credit access businesses to provide pre-and post-loan disclosures to consumers on the business premises or on the Internet at the business’s website. The business must post a schedule of all fees to be charged for services performed by the business in connection with a payday loan or motor vehicle title loan. A notice containing the name and address of the Texas Office of the Consumer Credit Commissioner and the telephone number of the office’s consumer helpline must also be posted to provide the consumer with a contact for complaints.
A credit access business must post its license and the following notice: “An advance of money obtained through a payday loan or auto title loan is not intended to meet long-term financial needs. A payday loan or auto title loan should only be used to meet immediate short-term cash needs. Refinancing the loan rather than paying the debt in full when due will require the payment of additional charges.”
A credit access business is also required to provide a disclosure to a consumer prior to performing any services for the consumer. The Finance Commission must provide the form of the disclosure, which must include:
The law does not require disclosure until the Finance Commission prescribes the form.
Finally, the legislation requires a credit access business to include additional information in the contract with the consumer informing the consumer about the transaction and relevant consumer protections. For example, the contract must disclose the lender from whom the payday or motor vehicle title loan is obtained, the interest that will be paid to that lender, and the specific fees that will be paid to the credit access business for its services. The contract must also state that the credit access business will comply with the Texas Debt Collection Law (Chapter 392 of the Texas Finance Code), the federal Fair Debt Collection Practices Act, and 10 U.S.C. § 987, relating to limitations on consumer credit extended to members of the military and their dependents. The credit access business must also provide a notice to a consumer obtaining a motor vehicle title loan that the consumer may lose the vehicle if the loan is not repaid.
New License Requirement
The Texas legislation also requires a credit access business to obtain a license to broker payday loans or motor vehicle title loans. The licensing requirement brings the businesses under the enforcement authority of the Texas Office of the Consumer Credit Commissioner, a department overseen by the Texas Finance Commission. Failure to comply with the enumerated laws above and rules enacted pursuant to Finance Commission authority could result in administrative penalties or the payment of restitution to harmed consumers.
Effective January 1, 2012, a credit access business must have a license for each business location that brokers payday or motor vehicle title loans to consumers in Texas. In order to obtain a license, the business must file an application for each location with the Texas Office of the Consumer Credit Commissioner. The application must be accompanied by an application fee set by the Texas Office of the Consumer Credit Commissioner for each application, an assessment of up to $200 for the Texas Financial Education Endowment Fund for each application, and a $200 investigation fee. The Texas Office of the Consumer Credit Commissioner may also require the applicant to file a bond of $10,000 for each license, up to a maximum of $2,500,000.
The Texas Office of the Consumer Credit Commissioner will approve a license if it finds that the applicant has the proper financial responsibility, experience, character, and general fitness to operate the business lawfully and has satisfied the minimum net assets required to operate the business of $25,000 for each location, up to a maximum amount of $2,500,000. Each license must be renewed by December 1st of each year by paying a renewal fee to be determined by the Finance Commission and the Texas Financial Education Endowment Fund fee of up to $200 for each license.
Texas CSOs should look at their business models, review the new law applicable to credit access businesses, and seek to obtain a license sooner rather than later. Even complete applications take time to approve, so credit access businesses should obtain a license application as soon as it becomes available on the Texas Office of the Consumer Credit Commissioner’s website at http://www.occc.state.tx.us/pages/industry/index.htm so that business can continue after January 1, 2012.
Nicole F. Munro is a partner in the Maryland office of Hudson Cook, LLP. Nikki can be reached at 410-865-5430 or by email at nmunro@hudco.com. Shawnielle D. Predeoux is a law clerk in the Maryland office of Hudson Cook, LLP. Shawnielle can be reached at 410-865-5425 or by email at spredeoux@hudco.com.
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