The Harsh Reality of Texas Payday Loans
Texas payday loans can quickly trap the unwary Houston consumer into a seemingly endless downward spiral of fees, interest and other charges. Due to borderline usurious tactics, in many cases consumers are forced to rollover interest and fees into their original payday loan as often as every two weeks in order to prevent default on the loan. As a result, consumers were sometimes forced to roll $60 or more into their original loans. Quickly, the compound interest and fees left many consumers paying two-week loans for more than a year.
Unfortunately, efforts to regulate this industry have failed. In 2001, the Texas legislature somewhat attempted to reign in these payday loan companies, but, were completely unsuccessful. They passed laws capping fees and interest a payday loan company can charge consumers. The Texas Finance Code now caps the maximum finance rate at $10 per $100 borrowed on these short term loans. Also, the law allows only one further "handling fee" to be charged at a maximum of $4 each month on loans over $100. This should have offered some protection to consumers who often found themselves in an endless cycle of fees, interest and other charges. However, the loan companies simply found a loophole to bypass all the new fee and interest caps placed on them.
Payday loan companies discovered they could slightly alter their business model and call themselves "Credit Service Organizations" (CSOs) rather than be highly-regulated as payday loan companies. CSOs fall under a different statute section, with almost no regulation because they are not considered lending institutions. CSOs are supposed to be credit repair companies helping consumers with their credit, rather than lenders extending loans.
So, how do these payday loan companies actually use the legal loophole to operate as a CSO? Once the registration fee is paid to the state, the new CSO acts as a "broker" for the loan at the payday loan storefront. The payday loan store collects a "referral fee" of $10-$40 for referring the client to the actual lender of funds. The payday loan store fills out the paperwork, for which they charge an application fee of roughly $10 per $100 borrowed, and then issue a "letter of credit" to the customer so that the lender will lend the funds. Because the actual lender collects the interest on the loan, they can maintain their status as a CSO with many of the benefits of a lender.
Texas Finance Code Section 302, which regulates usurious interest rates, does not apply to a company operating as a Credit Service Organization because they are not a lender but rather a credit repair organization. Because of this "loophole," payday loan companies have found new ways of charging additional interest and fees under the guise of a "broker." Therefore, under current law, there are no protections from what amounts to 800-900 percent interest rates for payday loans when granted under the umbrella of a CSO.
Further, these CSOs are not required to obtain a state license, but merely pay a small registration fee before being allowed to operate freely. Because a payday loan company does not have to be licensed by the state when operating as a CSO, there is no threat of revocation to their lending privileges nor must they post a bond to remain licensed. That means the organizations can nearly act with impunity as there is no real consequence involved with their lending practices. This discovery of using the CSO loophole has seemingly been a major windfall to payday loan companies. A quick online search of the yellow pages shows, for example, that there are 582 payday loan stores within the city of Houston alone.
As good as these loans are for the payday loan companies, they are equally bad for the consumer. The loans rake in huge profit for the companies while at the same time trapping the unwary consumer in a vicious cycle of escalating debt at 300-900 percent interest. The ability of Texas payday loan companies to avoid regulation by adapting to the Credit Service Organization model has allowed them to operate in a near predatory fashion. The sad part is that desperate consumers with bad credit will continue to fall into these traps because most don't have many other options.
