Today's Trends in Credit Regulation

Zoning: Another Arrow in the Consumer Advocate Quiver
By Catherine M. Brennan

It's a well-known fact that consumer advocates and attorneys general hate title loans. They absolutely hate them. It doesn't matter that making these loans is a legal business subject to heavy regulation at the state level, including licensure and limitations on fees. Title loans come with a hefty interest rate, and that alone is enough for consumer advocates to categorize them as predatory.

When Congress passed Dodd-Frank in 2010 in the wake of the Great Recession of 2008, it did so with the acknowledgement that it would do nothing to curtail interest rates in the states or nationally. That is, Dodd-Frank expressly states that it does not limit rates of interest. This was a loss for consumer advocates who lobbied for a national cap on interest rates. And it was a tremendous victory for title lenders and other subprime credit providers, as it preserved their businesses. In response, crafty regulators and legislators at the state and local levels have some up with new ways to choke off this type of "predatory" credit.

Enter zoning regulation. Zoning regulation is not a new tool in the social justice toolkit. It's been used for years to restrict "adult oriented business" like strip clubs and sex shops out of all but the most industrial of areas (and rightly so). The thinking behind zoning regulation is that there are certain businesses that are unseemly or unsafe, and thus should not be permitted in most spaces. This also leads to an "out of sight, out of mind" approach to regulation - if the business is hard to get to, most people will stop trying to go to it. This kind of zoning regulation is now being applied to regulate title lender (and payday lending) out of communities.

Texas is one of the battleground states for this kind of regulation. In 2011, in response to Texas Governor Rick Perry signing legislation to allow creditors to operate a title lending business through a credit services organization model, the Dallas City Council passed a law creating a new zoning classification of "alternative financial establishment." The council found that "alternative financial establishments" - which include a car title loan business, check cashers, money transmitters - have a "detrimental effect on neighborhoods and create the appearance of an area in decline." The ordinance also put specific restrictions on the amount of loans that can be extended and the terms under which they must be repaid. The industry, through the trade group Consumer Service Alliance of Texas, sued to stop the enforcement of the ordinance, saying it tries to preempt Texas law governing loan businesses.

That lawsuit hasn't stopped enforcement under the Dallas ordinance, and other cities in Texas, most recently El Paso, have adopted similar ordinances. The El Paso ordinance limits payday loans to 20%of the borrower's gross monthly income and auto-title loans to either 3% of the borrower's gross annual income or 70% of the vehicle's value. The ordinance also limits the number of installments to four, and rollovers and renewals to three. In addition, lenders will have to provide borrowers financial counseling information.

It's not surprising to see these types of local laws crop up. What is more surprising is that the local zoning enforcement agencies have demonstrated a willingness to stretch the application of the law to cover businesses that have operated in communities for decades, most notably traditional installment lenders.

What does this mean for your business? It means that you should have your ear to the ground so you will hear the rumblings of stealth zoning regulation if it comes up. And if you plan to expand, it means you need to review the local law of the community into which you want to move. Because if you don't, you may find yourself on the receiving end of a zoning enforcement action that could kill your business.

Catherine M. Brennan is a Partner of Hudson Cook, LLP, in the firm's Hanover, Maryland office. Cathy can be reached at 410-865-5405 or by email at

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