By Rebecca Lightsey

As more businesses close and unemployment lines lengthen, a virtually unregulated sector of the Texas economy continues to rake in huge profits by providing high-cost payday and auto title loan services that often drag desperate families deeper into financial crisis.

A Texas-based provider of such loans recently reported record-breaking annual revenues topping $1 billion and a net income of $81 million.

So how do small-dollar loan companies make this kind of profit in the middle of the nation’s worst economic crisis since the Great Depression?

In Texas, the answer is clear: they exploit a loophole in state law that allows them to operate as unregulated “credit services organizations” (CSOs).

In 2005, there were fewer than 100 CSOs in Texas. Today, nearly 400 payday, auto title, and other lenders operate more than 2,000 CSO storefronts offering high cost small loans across the state. CSOs in Texas were originally established to control credit repair businesses; however, in the past few years, small dollar lenders are operating as CSOs under a statutory loophole that allows them to obtain “an extension of consumer credit” for borrowers.

Unlike other lenders in Texas, CSOs are not subject to any limitation on the fees they can charge. CSOs routinely offer loans with costs exceeding 500 percent Annual Percentage Rate (APR) -- making these loans among the most costly in the country.

At the same time, CSOs also are able to sidestep licensing and enforcement by the state’s Office of Consumer Credit Commissioner, which holds other Texas consumer lenders accountable.

Borrowers stung by these CSO loan deals, with high fees and onerous terms, find it almost impossible to escape a widening sinkhole of debt.

One Austin woman recently reported taking out two payday loans totaling $1,800 from registered CSOs. Because she is not allowed to pay down the principal without paying the loan in full, she must pay over $400 every two weeks to renew the loans. Despite taking a second job and already paying $600 to retire the first $1,000 loan, she still owes $1,200 on it, and the second loan, still unpaid is racking up its own renewal fees.

Texans take out an estimated $2.5 billion in loans through CSO payday lenders each year and pay an additional $500-$600 million in annual fees.

Low-income Texans, primarily working women and minorities, disproportionately use payday loans. According to a recent Texas Appleseed survey of low-income payday borrowers, 58 percent of those borrowers could not pay off their loan, plus fees and interest, by the next payday.

Financial regulators in Florida and Michigan recognized this CSO scheme as an evasion of existing laws against predatory lending, and some CSOs, still operating in Texas, closed up shop in those states.

Congress imposed a 36 percent APR rate cap in 2007 on all payday and other short-term loans to the military, and 15 states and the District of Columbia have a similar provision in place for all residents. Already, some Texas cities -- including San Antonio, Richardson and Mesquite -- have passed ordinances restricting the rapid growth of CSOs within their city limits.

Now, it is time for state lawmakers to protect Texas consumers and hold CSOs accountable to the same regulatory standards that apply to mainstream lenders. Texas has a long-held tradition of opposing usury --lending money with excessive interest rates and fees -- and CSOs should not operate as the exception to the rule.
Lightsey is executive director of Texas Appleseed, a nonprofit public interest law center.
Copyright (C) 2009 by the Texas Lone Star Forum. 3/09