Legality of some payday lenders questioned

AUSTIN — In some cases, Texas payday-lending stores are violating a law requiring that they be completely separate from the institutions that supply the money to be loaned, according to an analysis published by an advocacy group Friday.

The distinction between payday lenders such as Cash America and the businesses that put up loan funds might sound technical. But that separation is what allows the payday-lending stores to charge fees that often exceed 500 percent when expressed as an annual interest rate.

The analysis was produced by Texas Appleseed, a group that advocates stricter controls on an industry that it says traps low-income borrowers in a cycle of high-interest debt. The group provided the template for payday-lending ordinances passed in El Paso and many other Texas cities.

The analysis was the product of years of work and an open-records lawsuit to obtain some of the information used in it.

It found that 22 percent of so-called “third-party lenders” listed in 2012 license applications for businesses to operate payday-lending stores had some sort of overlapping ownership between the lender and the business applying for a license.

“The whole legality of the industry in Texas hinges on this,” said Ann Baddour, director of Texas Appleseed’s Fair Financial Services Project.

In 2005, Texas’ payday lenders used a provision in the state Finance Code to adopt their current method of doing business.

They surrendered their licenses and partnered with third-party lenders. Those lenders must comply with usury provisions in the state constitution capping annual interest that unlicensed lenders can charge at 10 percent.

However, payday lenders, or “credit-access businesses,” guarantee the loans and in exchange can charge whatever fees they want from consumers. Expressed as annual interest, fees and interest in Texas average 457 percent to 522 percent, according to the Texas Appleseed report.

Rob Norcross, a spokesman for an industry group, the Consumer Alliance of Texas, agreed that it’s illegal for the ownership of third-party lenders to overlap with that of payday-lending stores.

“That’s prohibited by law,” Norcross said.

Nor did he dispute the accuracy of the Texas Appleseed report, which he briefly reviewed after its release Friday.

“That very well may be (that some companies are in violation), based on this data,” he said.

Norcross said the Office of the Consumer Credit Commissioner, the state regulator, had taken enforcement action against payday lenders for similar violations in the past.

On Friday, the commission’s parent organization, the Texas Finance Commission, proposed new rules spelling out the how operators of payday-lending stores need to be separated from third-party lenders. They’re subject to public comment, but Norcross predicted that the commission would adopt them largely in their present form at its December meeting.

Baddour and Texas Appleseed say that payday and auto-title lenders should be subject to interest-rate caps just as other lenders are. Barring that, they want the Legislature to clarify the law requiring separation between storefront operators and the ultimate moneymen.

“I think the intent is clear, but the wording isn’t very clearly defined,” Baddour said.

Texas Appleseed conducted its analysis using information gleaned from applications for licenses by payday lenders in 2012 — the first year they were required. Those applications listed the third-party lenders from which the payday-lenders proposed to get their money.

Texas Appleseed had to go to court to get access to the information because Norcross’ group, the Consumer Alliance of Texas, argued that the ownership information amounted to trade secrets.

Baddour countered that whenever a borrower takes out a loan, the name of the third-party lender is on it, so the information is hardly confidential.

Norcross said his organization realized it was fighting a losing battle.

“We figured out that we weren’t going to win, so we dropped the suit,” he said.

The Texas Appleseed analysis also found highly concentrated ownership among third-party lenders, leading it to question how competitive the industry is.

For example, NCP Finance of Dayton, Ohio, is Texas’ largest third-party lender. In 2012, it served 1,237 of the state’s 3,272 payday-lending locations. Among the payday lenders it served were ACE Credit Access, Cash America Financial Services and TitleMax of Texas, although some of those businesses also used other third-party lenders.

In all, the top five third-party lenders in terms of stores serviced 77 percent of all licensed locations, the report said.

“Although the CSO model is structured in a way that is intended to promote competition among a variety of third-party lenders, in practice, this does not seem to be the case,” the report said. “While, on the outside, it appears that the third-party lender market is robust with competition, behind the corporate veil, there seems to be significant concentration in the capital sources for payday and auto title lending businesses in Texas— through overlapping ownership among third-party lenders and the market domination of a few large players.”

However, Norcross said the size of the biggest third-party lenders has little effect of the cost of payday loans to consumers. Their interest rates are capped at 10 percent and almost all lend at rates ranging between 9.5 percent and 10 percent, he said.

Marty Schladen may be reached at 512-479-6606; mschladen@elpasotimes.com; @martyschladen on Twitter.