Texas CSO-CAB Payday Loans

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Texas CAB - Texas CSO - Credit Access Business

Beginning in July of 2005, the major Texas payday loan operators began registering as "Credit Services Organizations" commonly referred to as a "CSO." This includes Advance America, Cash America, First Cash, EZ Pawn, and EZ Cash in addition to many, many small payday loan operators.

Effective January 1, 2012 the Texas OCCC transitioned the Texas CSO Model to a Credit Access Business CAB Model.

Prior to the switch over to the CSO>CAB model, virtually all these cash advance operators utilized the bank-charter model; partnering with banks incorporated in states lacking usury laws (referred to as the "payday loan bank model." By partnering with these banks and acting as brokers, the payday loan operators were able to export the usury rate applicable to their partner bank into Texas; or whatever state the payday loan operator/broker located. Many Texas payday loan lenders used the Regulated Lender licensing model as well. This model has fallen out of favor because of the lower consumer fees allowed.

What is a Texas CSO Credit Services Organization?
In essence, a CSO or Credit Services Organization is defined by the Texas Credit Services Organization Act (Section 393 of the Texas Finance Code) as an entity or person that provides one of the following services:

• Improving a consumer's credit history or rating
• Obtaining an extension of consumer credit for the consumer
• Providing advice or assistance to a consumer regarding the previous two services

An important aspect of the CSO or Credit Services Organization model is that there IS NO LICENSING required by the state! CSO's are required to "REGISTER" with the Secretary of State, they are NOT licensed, AND THEIR FEES ARE NOT REGULATED.

The major impact of the 2012 CAB Act was to formally disclose who the 3rd-party lender is in the relationship. Additionally a minimum $25K net-worth requirement kicked-in.

How does the CSO Credit Services Organization work with payday loans?
The CSO Credit Services Organization operates as a broker, much as they did when partnering with the banks (payday loan bank model). The Texas Credit Services Organization Act (CSOA) allows the payday loan lender to register as a CSO and act as a loan broker. Thus, the CSO, previously a payday loan company, can make loans via consumer lending companies that are UNREGISTERED and UNLICENSED (Again, note that this changed January 2012). The CSO Credit Services Organization acts as a broker for the consumer in need of funds by issuing a "letter-of-credit" on behalf of the consumer to a lender. This third-party lender funds the "loan" brokered by the CSO "broker."

Typically the Texas CSO Credit Services Organization collects 3 fees:
• A referral fee for referring the consumer to the lender that actually funds the "loan." This is not stipulated by any law but is currently $20 to $30 per $100
• An application fee for filling out the CSO documents; typically $10 per $100
• The interest on the "loan;" Texas state law caps this at $10 per $100.

The Texas CSO Credit Services Organization Model arises from a U.S. Fifth Circuit Court of Appeals opinion, in Lovick vs. Rite Money, which held that payments to a registered CSO loan broker could not be treated as interest.

The applicability of the CSO Credit Services Organization to use in other states is being explored now. Thirty-one states plus Canada have provisions for the CSO Credit Services Organization entity. Since it is typical of the CSO not to be regulated, and the fact that the CSO fees are not considered interest as per the 5th Circuit Court of Appeals, there is little doubt we will see this approach utilized on a grand scale in the future!

For a thorough discussion of the CSO Credit Services Organization Model including the applicable Texas Statutes and the CSO>CAB Registration Form for Texas, we invite you to purchase our CSO Report.