The Texas Credit Service Organization Loophole

In Texas, there is a constitutional prohibition against charging interest greater than ten percent without the approval of the Texas legislature, and Section 11 of the constitution states that such loans are usury. Predatory lenders circumvent this by registering as "credit service organizations." Using this registration information, Texas Faith for Fair Lending has created maps of CSOs in each Texas senate district. Here is the map for my senate district 14, for example. Only some of the payday lenders that surround my neighborhood are represented on the map, which makes me unsure about how current the information might be. It's obvious from the list associated with the map that most pawn shops don't have to register as CSOs, even though they may make a variety of predatory loans. The only exception seems to be that Austin's EZCorp registers its EZPawn locations as CSOs.

Wells Fargo has the largest dollar amount of deposits in Austin, Texas, so I am going to use it and EZCorp as an example of how this loophole works. You can see from the flowchart in my earlier post how money flows between banks and predatory lenders, including EZCorp and Wells Fargo. Wells Fargo is the lender, and makes a loan brokered by EZCorp that is under the constitutional limit, but for which EZCorp may charge unregulated loan fees. I'm not aware of what EZCorp considers its maximum fees, but many predatory lenders end up charging fees that amount to 400-500% APR.

Texas cities, including Austin, have taken action to regulate predatory lenders via zoning and regulatory ordinances because the state legislature has been bought by lobbyists, namely the predatory lending industry organization misnamed The Consumer Service Alliance of Texas and the law firm Armbrust and Brown.  CSAT has filed a lawsuit against the City of Austin after passage of the regulatory ordinance earlier this year, citing conflict with state law because the ordinance forbids the expensive practice of rolling over loans more than once and sets the maximum loan amount. It is clear from the state constitution and law that only the state government can regulate interest rates, or even join other states that have banned payday lenders entirely. Given the unlikelihood that state government will free itself from the lobbyists' grip, I hope the US Comptroller of the Currency will forbid federal banks from funding these predatory loans, similarly to the way federally-chartered banks were forbidden to finance income tax refund anticipation loans brokered by HR Block, Jackson-Hewitt, et al.

A disturbing national trend is for banks to compete directly with store-front predatory lenders, even to the point of opening branch banks in strip malls that mimic the appearance of the payday lenders usually found there. If there is any limit in Texas on what banks could charge in the way of fees and interest, I'm sure their lobbyists will take care of them. Wells Fargo is one of the banks following this trend, although perhaps not yet in Texas. Both banks and non-banks are being examined by the Consumer Financial Protection Bureau. Director Richard Cordray says, “We look at alternative financial products offered by both banks and nonbanks through the same lens — what is the risk posed to consumers? Practices that make it hard for consumers to anticipate and avoid costly fees would be cause for concern.”