How Payday Lenders Use Credit Access Businesses to Offer Loans exceeding Texas’s 10% Interest Cap.
By: Jer at Trihouse Consulting. Article 16, Section 11 of the Texas Constitution imposes a 10 % cap on the amount of interest that can be charged on personal loans. What’s so amazing is that it’s estimated that the state of Texas is responsible for more than 60% of the nationwide annual profits flowing to the payday loan and car title industries.
How? Credit Access Businesses (CAB’s) and Credit Services Businesses (CSO’s). Texas regulators allows lenders to incorporate their storefronts and websites as separate, but affiliated, entities that—on top of the 10 % interest they collect on behalf of a lender—then legally charge additional fees and interest for the services that they provide by “referring” consumers to the lender and servicing the loan.
In Texas, payday and auto title store fronts are allowed to register as Credit Access Businesses (CAB) under the state’s Credit Services Organizations Act.
This Act imposes no limits on fees, interest rates, loan amount size, or refinances, and it does not require the CAB to assess ability to repay based upon the consumer’s income. [Although obviously, this is a calculation all lenders make in order to make certain the borrower can successfully pay back the loan. Lenders do not simply give away money. They need to be repaid! [See our Manual for strategies to accomplish this.]
Accordingly, for single payment products – payday loans for example – offered in Texas, CABs often charge an “origination fee,” typically ranging from $22 to $30 per $100 borrowed and, if the borrower is unable to repay the loan by the due date, a “refinance fee” that is usually identical to the amount charged as an origination fee.
Because of the third-party lending structure, CABs also charge consumers up to an additional 10 % annual interest rate while the loan is in repayment on the lender’s behalf.
The state’s “estimated average payday loan borrower can pay up to $840 for a $300 loan and monthly fees for a $4,000 auto title loan often exceed $1,000.” [This estimate by the State of Texas is questionable. Obviously, if we were to consider a “Bell Curve” there would be Texas payday loan borrowers on both ends of the “Bell.”]
The Point? Operated “correctly,” a Texas based payday loan business can be very profitable. For a complete, step-by-step explanation of “How to Start and Operate a Payday Loan Company” in any State, we recommend our Manual; considered by many to be “The Bible” of the lending industry.
Have questions? Need help? Jer@TrihouseConsulting.com or 702-208-6736