When the Texas Legislature passed new rules governing the payday and auto-title lending industry in 2011, lawmakers accidentally (or not) left gaping holes large enough to drive large, cash-laden trucks through.
It was little surprise, then, that that's exactly what's been happening. The Texas Observer's Forrest Wilder found one of the loopholes when he visited an outlet of the Irving-based Cash Store and discovered that, by signing a photocopy of a blank check rather than a real, post-dated check, the store was able to claim, apparently truthfully, that it's business isn't covered under the state's payday lending laws.
Local regulations passed in Dallas, Austin and San Antonio were tougher, but they have the major shortcoming of being local; step outside the city limits and they don't apply. WFAA's Brett Shipp found that out over the summer, when he reported that outlets in Dallas are giving customers loans, then forcing them to move the loans outside the city, where caps on interest rates, fees, the number of installments and other practices aren't quite so strict.
The state's Office of Consumer Credit Commissioner has taken note and is not going to stand idly by while the businesses they regulate blatantly exploit loopholes in the law. No sirree. They are going to send them a letter warning that exploiting loopholes in the law might prompt lawmakers to close said loopholes. Two letters, actually.
The first is directed at credit service organizations (CSO) that are doing more or less what Wilder describes:
The business practice at issue is as follows. As contemplated by Chapter 393, the CSO assists the consumer in obtaining credit and charges a fee for this service. But the CSO does not take a post-dated check from the consumer or, in the case of a loan secured by the consumer's motor vehicle, the motor vehicle's title. By not requiring the consumer to provide a post-dated check or the motor vehicle's title, the CSO contends that the activity falls outside the definition of "credit access business" (CAB) and therefore escapes the regulatory requirements imposed on CABs in Chapter 393 of the Texas Finance Code. The Texas Finance Code does not specifically prohibit this practice; nevertheless, this transaction could be seen as an attempt to evade the regulatory requirements of Chapter 393 and an attempt to circumvent the law.
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The second aims at the concerns raised by Shipp's piece:
It appears that a number of CABs are engaged in the following practice. A CAB branch located within the city limits offers the consumer a no-interest, 30-day loan funded by the CAB and secured by the consumer's vehicle. If, at the end of the month, the consumer cannot pay off the loan, the CAB informs the consumer that the consumer's vehicle will be repossessed if the consumer does not pay the loan off. The CAB then proposes that the consumer go to another branch location outside the city limits and obtain a CAB loan to pay off the original loan and keep the vehicle from being repossessed.
The OCCC is concerned about the lack of transparency involved in this practice, which effectively draws into a CAB transaction a consumer who might not otherwise engage in one. This business model could also be perceived as a deceptive practice because it appears calculated to bring the consumer into the store with the promise of one product, but later effectively requires the consumer to go to another location to purchase another product.
And what is the OCCC going to do if businesses keep doing these things? Nothing. While these practices are pretty clearly designed to circumvent established rules, the OCCC writes, they don't actually violate existing statutes.
The OCCC is quite concerned, however, that such practices might cause lawmakers to suddenly realize they left gaping holes in their legislation. The agency writes that it "is concerned about the possible legislative reaction to this practice and this business model's lack of transparency. The agency strongly urges any credit access business currently engaged in this practice to consider the legislative and legal consequences."