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.”

Payday Lender Zoning Ordinance Vote Today

In advance of today's city council vote on the payday lender zoning ordinance, The Right Reverend Joe Vasquez, Bishop of the Diocese of Austin, makes public the support for this ordinance by the Catholic Church, Central Presbyterian Church, United Christian Church and the St. Vincent de Paul Society. Bishop Vasquez gives an actual dollar amount to a problem Catholic Charities and other organizations that promote financial stability have with payday lenders.

"According to Bishop Joe Vasquez, about $1 million from Catholic charities statewide has gone to fix the messes left behind when people use payday lenders."

Craig Smith, Director of Governmental Affairs for Austin-based EZCorp, responded with the following statement.

"Blaming the alternative financial services industry for filling in where traditional lenders have deserted borrowers is misguided.

Like the restrictive lending ordinance passed by the City Council last August, the zoning ordinance currently being considered will actually hurt borrowers by further limiting the credit alternatives for Austinites who have been abandoned by the mainstream banking community." (Read the full statement.)

Actually, Austinites have not been "abandoned by the mainstream banking community." Instead Wells Fargo, Bank of America, JP Morgan Chase, US Bank, and Credit Suisse have joined payday lenders such as EZCorp in preying on the poor by lending them money to expand their businesses and to make predatory loans, as indicated in the flowchart below from my earlier post.



My series of posts related to this subject matter follows:

Payday Lenders in Austin, Texas
A Volunteer Solution to Predatory Tax Refund Loans
The Cordray Index
The Cordray Index Losers
5.7 Lenders per Mile Update: Yet another auto title loan operation is opening at Manchaca and Stassney.
RAC and RAL
A Bite Out of the Poor
Netspend and BET Take a Bite Out of the Poor
ZestCash Takes a Bite Out of the Poor

Payday Lenders in Austin, Texas

I'm going to pick on Austin since I live there, and on EZCorp, since it is headquartered here. There are, of course, other payday lenders active in Austin. Also, there are banks which do not lend money to payday lenders. The diagram below "follows the money" from the banks that do lend money to payday lenders like EZCorp et al. Read the PDF version of the full report here.

Note the relationship between EZCorp and Wells Fargo. Particularly my Facebook friends know I am an advocate of moving accounts to credit unions and small local banks, and this is yet another reason why. As you can see from this Google map, Wells Fargo has quite a presence in Austin as well.

Some more pertinent information from the same report:

"Bank of America and its subsidiaries (mainly BlackRock) own significant stakes
in four of the top five payday lenders: Advance America, Cash America, EZCorp,
and Dollar Financial (9.8%, $47 million)."

"Wells Fargo owns a significant stake in Dollar Financial (10.78%, $52 million)."

"Wells Fargo finances Las Vegas pawnshop chain purchase. In late 2008, Wells Fargo tripled the size of its credit line to EZCORP from $40 million to $120 million to help finance EZCORP’s acquisition of pawn shop chain Value Financial Services and eleven pawn shops in Las Vegas."

Table 5. Wells Fargo received $25 billion dollars in TARP bailout funds and financed ACE Cash Express, Cash America, First Cash Financial

Wells Fargo and other banks continue to borrow at record low interest rates from the Federal Reserve and loan the money to payday lenders making loans with interest rates of  400-500%.

The Austin City Council has scheduled a vote today on payday lender regulations. Since they are not allowed to set interest rates, the city is seeking to regulate the locations of payday lenders and cap the amount of money they can loan to an individual. Austin's Republican State Senator Jeff Wentworth was part of an unsuccessful bipartisan effort to cap interest rates in Texas during the recent legislative session. (Presently there is no cap at all.)  According to Wentworth, "What did get passed is that payday lenders have to register consumers to now make complaints.”