Texas, Local, & Self-Imposed Standards for Payday & Auto Title Credit Access Businesses A Dallas-Based Compliance Survey: May 2012

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1 Texas, Local, & Self-Imposed Standards for Payday & Auto Title Credit Access Businesses A Dallas-Based Compliance Survey: May 2012 Effective January 2012, payday and auto title businesses operating under the Texas Credit Services Organizations Act (CSO Act) must be licensed under the Act as credit access businesses and must comply with new state loan disclosure requirements aimed at ensuring that consumers are aware of the true cost of payday and auto title loans before they borrow. Payday and auto title businesses operating within the Dallas city limits must comply with even more stringent requirements. The Dallas City Council approved a new city ordinance (No ) last June that limits the size of payday and auto title loans to borrower income levels, caps the number of allowable loan rollovers/renewals or installments, and requires that a portion of each repayment be applied to retiring the loan principal. Consumer Services Alliance of Texas (CSAT) the payday and auto title lending trade association has its own set of best practices for its members to follow. 1 The CSAT best practices essentially track general compliance with state and federal law, while offering some departure in the area of in-store information. This spring, public interest law center Texas Appleseed designed a survey to assess compliance with posting, consumer disclosure, and product standards prescribed under one or more of the following: new state laws, Dallas City Ordinance No , and CSAT s best practices standards. Members of the Anti-Poverty Coalition of Greater Dallas 2 collected the survey data from a sample of the 37 CSO payday and auto title loan businesses operating in the City of Dallas. 3 (Survey form, see Attachment 1.) 4 This report analyzes the collected data to determine whether new state and local ordinances and self-imposed industry standards are having an impact on the payday and auto title lending industry. 1 The latest version of the best practices posted on the association website as of May 18, 2012, was last updated in November The Anti-Poverty Coalition of Greater Dallas is a broad-based partnership that unites the business community, faith-based organizations, social service agencies, academia, government entities, and foundations together to identify and eliminate parries preventing families from moving out of poverty and into financial self-sufficiency. By 2020, the Coalition wants to move 250,000 more people out of poverty permanently. 3 See Attachment 1 for a copy of the survey instrument. 4 This survey does not assess compliance with all legal or best practices standards, including: required contract disclosures, compliance with fair debt collection practice, and a three-day right to rescind. Fair debt collection and right to rescind can only be assessed by taking out a payday or auto title loan, which is outside the scope of this survey. No surveyed payday or auto title loan location allowed survey volunteers to view or have a copy of a loan contract. Data for this survey was collected between April 5 and April 11,

2 Summary Findings There is a low level of compliance among the 37 surveyed payday and auto title businesses with state law, Dallas city ordinance requirements, and industry best practice standards for disclosures, information postings, and product restrictions. (Note: State law does not address product restrictions.) Just one location complied with all of the state law disclosure and posting standards included in the survey. Three locations did not comply with any. None of the locations complied with the terms of the Dallas city ordinance. Only one location complied with all of the CSAT trade association best practices included in the survey, and 16 did not comply with any. The average charges for payday and auto title loans among the 37 range from 24 to 66 times the Texas constitutional usury cap of 10% interest. A Snapshot: Payday & Auto Title Lending in Dallas Dallas currently has 241 locations with a credit access business license or provisional license that is required to offer payday or auto title loans under the Texas Credit Services Organizations Act. The survey sample includes 37 storefront locations operated by 13 different payday and auto title businesses. All are members of the CSAT trade association and operate 86% of all payday and auto title locations in Dallas. Business Name Surveyed Payday and Auto Title Businesses Number of Survey Locations Total Number of Dallas Store Locations Percentage of Locations Surveyed Ace Cash Express % Advance America % Cash America Pawn % Cash Max % Check n' Go % EZ Loan Money Services % First Cash Advance/Pawn % Loan Star Title Loan % Money Max Title Loan % PLS Check Cashers % Texas Car Title and Payday Loan % The Cash Store % Title Max % Total % 2

3 Each of the surveyed locations appears on the list of licensed or provisionally licensed credit access businesses (CABs). The survey found a few discrepancies between the actual operating address of some CAB locations and the address appearing on the licensing list. 5 Also, all of the surveyed locations are registered as credit services organizations with the Texas Secretary of State, which is required by law. 6 Among surveyed businesses, the annual percentage rate (APR) charged for payday and auto title loan products ranged from a low of 36% APR for an auto title loan to 927% APR for a payday installment loan. These reported low- and high-end APR rates are atypical. Most payday and auto title products are offered at interest rates ranging between 300% APR and 750% APR. The information in the chart below is based on rate and fee disclosures and teller information obtained at the surveyed store locations. Loan Charges at Surveyed Locations 7 Business Name APR Payday APR Payday APR Auto Title APR Auto Title Single Payment Installment Single Payment Installment Ace Cash Express 588% - 662% 314% - 406% 193% - 253% 275% Advance America 533% 36% Cash America Pawn 533% 98% Cash Max 792% Check n' Go 583% - 584% EZ Loan Money Services 585% 972% 325% First Cash Advance/Pawn 584% 273% Loan Star Title Loan 372% - 377% Money Max Title Loan PLS Check Cashers 662% 713% - 714% 314% Texas Car Title and Payday Loan Services 403% - 664% 308% 352% The Cash Store 612% Title Max 182% Average* 580% 664% 356% 242% *The average reflects the mean of the responses under each heading. When a range of rates is provided for a single company, the mean of those two rates is used as the company rate for purposes of computing the overall average. 5 List of licensed and provisionally licensed credit access businesses, Office of Consumer Credit Commissioner (April 6, 2012). One location of PLS Check Cashers has a slightly different address than the address on the licensing list, with two numbers transposed. One of the Texas Car Title and Payday Loan Services locations is licensed under another business name, An Internet search of the address of the Texas Car Title and Payday Loan Services Location that is licensed as Premium Title Lending, also found that Texas Car Title and Payday Loan Services is at that location. See for example: 6 List of registered credit services organizations, Texas Secretary of State (November 2011). The same location of Texas Car Title and Payday Loan Services (see prior footnote) was registered under Premium Title Lending. 7 Blank data fields indicate that either the loan product was not offered at the store location or volunteers did not collect data for that field. Supra at 4. 3

4 The average charges for payday and auto title loans among surveyed Dallas businesses range from 24 to 66 times the Texas constitutional usury cap of 10% interest and are approximately three to eight times the legal rates for licensed consumer lending in Texas, under Title 4, Ch. 342 of the Texas Finance Code. As previously stated, the survey documents a low level of compliance with state, local, and industry trade association disclosure and product standards. A more detailed analysis is provided below. Compliance with the State Posting & Disclosure Standards (CSO Act) The following table documents important requirements for posting and disclosure at store locations per the Texas Credit Services Organization Act, Chapter 393 of the Texas Finance Code. Texas Credit Services Organization Act Posting and Disclosure Standards Assessed in Compliance Survey, 2012 Standard Citation Description 1. Post Fees 2. Post OCCC Contact 3. Post Warning Notice 4. Provide Disclosure Form 5. Show CSO Registration Tex. Fin. Code (a)(1); 7 Tex. Admin. Code Tex. Fin. Code (a)(2) Tex. Fin. Code (a)(3) Tex. Fin. Code Tex. Fin. Code Post a schedule of all fees for payday and auto title loan services in a conspicuous location. Posting must include fees, annual percentage rate of the loan, and standard loan term. Post a notice of the name and address of the Office of Consumer Credit Commissioner and the telephone number of the consumer helpline. Post a notice that reads: An advance of money obtained through a payday loan or auto title loan is not intended to meet long-term financial needs. A payday or auto title loan should only be used to meet immediate short-term cash needs. Refinancing the loan rather than paying the debt in full when due will require the payment of additional charges. Provide disclosure form adopted by the Finance Commission of Texas that discloses interest rates, fees, annual percentage rates, amount of accumulated fees incurred through renewals, information comparing the loans to other credit sources, typical customer repayment information and a warning about repossession for auto title loans. A credit services organization must show the CSO registration statement to a consumer if requested. 6. Comply with Federal Standards for Loans to Military Tex. Fin. Code Loans to the military and military dependents must follow requirements under federal law. 4

5 From a review of loan application documents collected by survey volunteers for some payday and auto title locations, it was also possible to partially assess compliance with a state mandate that payday and auto title businesses in Texas comply with federal lending requirements to the military and their dependents. In addition to capping rates for payday and auto title loans to the military and their families at 36% APR, federal law requires payday and auto title businesses to determine if a potential borrower is a member of the military or a military dependent. The survey found many deficiencies in compliance with the basic standards outlined above. Only 46% of the surveyed locations posted fees in a manner prescribed by state law. Only 41% of the locations posted the Office of Consumer Credit Commissioner contact information and offered the legally proscribed loan disclosure upon request. According to survey results, the required warning notice to consumers about the potential to incur additional charges was posted at only 22% of the 37 surveyed store locations; 46% of the store locations did not show volunteers their CSO registration document upon request. One volunteer commented, "They said they were registered [as a CSO], but would not show me any forms until I brought back all my information." 100% 80% Compliance with CSO Act Standards Surveyed Dallas Payday and Auto Title Businesses, % 3% 3% 3% 22% 8% 38% 60% 30% 54% 76% 51% 40% 46% 20% 46% 41% 41% 0% 22% Post Fees Post OCCC Contact Post Warning Notice Provide Disclosure Form 16% Show CSO Registration Disclosed Not Disclosed Disclosed, but difficult to read or see No Information collected 5

6 In addition to noncompliance with the posting and disclosure standards, some locations provided misleading information. 8 In the fee posting, one business listed the loan interest rate as 13.99%, 11.99%, and 10.99% for a 30-day auto title loan. The business listed the monthly interest rate charged for an auto title loan instead of the annual percentage rate, as required by law. These monthly rates are the equivalent of % APR, % APR, and % APR respectively. 9 In addition to misrepresenting the interest cost, the fee disclosures were printed in small type, less than 12 point. Some tellers made similar misrepresentations about the cost of the loans, as one volunteer wrote, [the teller] showed an actual contract to me, but said the interest rate of 402% wasn't important. The interest due every two weeks was 15%. Two of the disclosure forms appeared to violate the standards in the law. One copy was of such poor quality that it bordered on illegible. On another form, the cost of the loan over time was misrepresented: instead of listing cumulative fees over time as required, the form lists the same amount paid total for different time increments, implying that no additional fees are charged for extending the loan beyond the original two-week loan period. Using the loan applications and customer information forms collected, it is possible to provide a preliminary assessment of compliance with the requirement that potential borrowers be asked about their military and military dependent status. Applications or customer information forms were collected for seven of the 13 payday and auto title businesses surveyed for compliance with this one standard. Three of the seven forms included a question asking the customer whether he/she is a member of the military or a military dependent. Another customer information form listed a military identification card as an acceptable form of ID, but did not include a specific question about military or military dependent status. Though not conclusive, this finding raises some concerns about compliance with the payday and auto title loan protections afforded the military and their dependents under state and federal law. Compliance with the Dallas City ordinance Standards Dallas Ordinance No , which addresses payday and auto title businesses, took effect on January 1, The ordinance includes three product standards for payday and auto title loans detailed in the table below. Only three locations surveyed shared income requirements for the loan. One location indicated that a customer could borrow up to 25% of monthly income for a payday loan. Another location indicated that a minimum of $200 monthly income was necessary for a $500 loan, though the type of loan payday or auto title was not specified. The third location indicated that a 8 See Attachment 2 for a copy of the forms described in this section. 9 These annual percentage rates were calculated using an annual percentage rate calculator provided by the Office of Comptroller of the Currency. 6

7 borrower needs to have at least $1,200 in income every two weeks to borrow $500. This income limit, at 21% of the borrower s monthly income, was the closest of the three to the ordinance standard of 20% of gross monthly income for a payday loan. Dallas Ordinance No Standards Assessed in Compliance Survey, 2012 Standard Citation Description 1. Loan Limit Based on Income 2. Rollover and Installment Limit 3. Principal Reduction with Every Payment SEC (a) and (b) SEC (d) and (e) SEC (d) and (e) Payday loans cannot exceed 20% of the borrower s gross monthly income. Auto title loans cannot exceed the lesser of the following: 3% of the borrower s gross annual income or 70% of the value of the vehicle. Limit of three loan rollovers/renewals or four installments. Each rollover, renewal, or installment payment must reduce the loan principal by 25%, such that the loan is paid in full after four payments. The rollover/renewal/installment limits disclosed to survey volunteers exceeded the ordinance s three-renewal/four installment limit. Information on renewals was collected for 22 of the surveyed locations. The lowest number of renewals reported was four, and the highest was no limit. The locations that offered installment products offered 140-day to two-year installment terms, which appear to exceed the four-installment limit under the ordinance. In one location with a four-renewal limit, the teller noted, If you can't pay [the loan back after four renewals], then wait a day, come back, and take out another loan to repay the old loan. 50% Loan Renewal Limits Surveyed Dallas Payday and Auto Title Businesses, % 41% 30% 27% 20% 19% 10% 0% 3% 5% 5% 4 Renewals 5 Renewals 6 Renewals 7 Renewals No Limit No Information No information was collected on the 25% principal repayment requirement, but for locations 7

8 with four or more permitted renewals, this standard is clearly being violated. Compliance with CSAT Best Practices The CSAT website includes a list of 14 general best practices plus five additional standards for auto title loans. 10 Twelve of the 19 standards reflect basic compliance with existing laws and assessing compliance would require an examination of loan files or taking out a loan. The survey captures compliance information for three of the remaining seven best practices. 11 Standard 1. Display of the CSAT Membership Seal 2. Notice Requirements of CSAT Best Practices 3. Consumer Financial Literacy CSAT Best Practices Standards Assessed in Compliance Survey, 2012 Description Members shall prominently display the CSAT Membership Seal in all business locations to alert customers to the store's affiliation with the association and adherence to the association's Best Practices. Members shall post a copy of CSAT's Best Practices in all business locations in a visible and conspicuous location. Members will make consumer financial literacy materials available to consumers in all business locations in any form prescribed by CSAT. There was a low level of compliance with the CSAT best practices assessed in the survey. Twenty-four percent of the store locations posted the CSAT seal; 30% posted the CSAT best practices at the store location. Only 19% of the locations offered any consumer financial literacy materials, as required by the best practices standards. 100% Compliance with CSAT Best Practices Surveyed Dallas Payday and Auto Title Businesses, % 5% 3% 80% 60% 40% 70% 65% 78% 20% 0% 24% 30% Post CSAT Seal Notice of CSAT Best Practices Consumer Financial Literacy Materials Disclosed Not Disclosed No Information collected 19% 10 See: Accessed May 16, The standards not assessed as part of this survey include: trade association enforcement, a complaint handling protocol, and standards for vehicle valuation for auto title loans. CSAT also requires its members to implement procedures to inform consumers of the intended use of their credit service. The vague nature of this standard made it impossible to assess compliance. 8

9 Conclusion The results of this study highlight major short-comings among the surveyed businesses. The low compliance with the fee and product disclosure requirements and the incidences of misleading information indicate that many consumers continue to enter payday and auto title transactions without a true sense of the cost of the transaction. The high rollover limits in the survey indicate that payday and auto title loans continue to be structured for multiple, if not limitless renewals and fee payments. Limited information on income parameters for borrowing could indicate limited examination of the borrower s ability to repay the loan in the designated loan term. Finally, the low compliance rate with the simplest of the CSAT best practices calls to question the effectiveness of a self-policing model. 9