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But on June 30, Advance America, the largest payday lender in the United States, said it had abandoned its relationship with banks and would act at its 208 centers in Texas as a credit services organization. First Cash Financial Services of Arlington, a payday lender with more than 300 stores in 11 states and Mexico, said the same. A day later, July 1, Cash America's Tom Bessant followed suit, saying the company would now offer loans as a CSO. On July 15, EZCORP of Austin did the same. Its 177 payday lending storefronts in Texas now register as CSOs.
The move meant increased stock prices for the lenders and rosier financial outlooks, which had been dismal following the FDIC ruling.
"Every big payday lender in Texas has switched from the model [with the banks] to the CSO model," says Rich Tomlinson, a Houston lawyer. (That's not quite true. ACE Cash Express now offers a 20-week installment plan that will pay down the loan's interest and the principal at the same time.) "Payday lenders will turn into any shape or form to continue to do what they're going to do," Tomlinson says.
He has extensive knowledge of CSOs. He argued in a class-action suit last summer that the $1,500 a Texas CSO received as a broker fee on a $2,000 loan was "disguised interest" and amounted to "usury." He argued that the broker, not the lender, worked to arrange the loan and was responsible if the loan defaulted. "The real lender here is the broker," Tomlinson says. Yet the broker is not regulated.
Leslie Pettijohn, Texas' consumer credit commissioner, says regulators will get it right eventually. "We will certainly be looking at the activities of the CSOs. We are going to have very strict compliance," she says. "If we see something illegal on the CSO side, it will go to the attorney general's office" for prosecution.
Cash America's Tom Bessant says the switch to CSOs is nothing nefarious. "We're out to make sure that when people need money, they can get money," he says.
It's an argument that angers Tomlinson. He takes the blame for the change in business models. The Fifth Circuit Court of Appeals ruled 2-1 against Tomlinson last summer, saying he failed to state a claim upon which relief could be granted. Had he won the case--well, who knows in what state payday lenders would find themselves today?
"My loss," Tomlinson says, "is the template by which these companies stay alive. And that makes me ill."
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