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Press Release February 21, 2001 |
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STUDY: LOAN SHARKING
ALIVE AS LENDERS USE
'SALE LEASEBACKS' TO ESCAPE TEXAS USURY LAWS
HBs 1816 and 1809 would close sale-leaseback loophole
AUSTIN, TX -- Fourteen of 21 companies engaged in the business of providing fast cash surveyed by Consumers Union in February are actively pushing so-called "sale-leaseback" arrangements which carry effective interest rates far in excess of those allowed under Texas usury laws.
"Our report shows these lenders are cleverly preying on desperate individuals and trapping them into a cycle of debt that runs afoul of both Texas usury laws and state regulations," said Rob Schneider, senior staff attorney with CU's Southwest Regional Office.
Sale-leaseback transactions resemble payday loans, except the borrower signs a paper "selling" personal property to the lender for the amount borrowed but gets to keep the property for a "rental" payment usually of $33 for every $100 borrowed. Effective interest rates for these transactions exceed 700 percent.
Last year, the Office of Consumer Credit Commissioner attempted to curb usurious lending by adopting a regulation to license payday lenders and cap their fees. Licensed payday lenders may charge a $10 fee up front, plus $4 per $100 per month - essentially the same rate that "signature" loan companies may charge for loans under $480.
"Sale-leasebacks walk like a loan, talk like a loan and act like a loan," Schneider said. "Make no mistake, they are a loan, and a usurious one at that. Yet, seven of the operations identified in our study insisted 'this is not a loan' and the Yellow Pages now even sport a new section called 'Loan Alternatives.'"
Schneider said CU concurs with recommendations by the Texas Sunset Advisory Commission and the Senate Economic Development Committee and is asking the Legislature to close the sale leaseback loophole in Texas law. Two bills, HB 1816 (McCall), the Consumer Credit Commission Sunset bill, and HB 1809 (Deshotel) will close the sale-leaseback loophole by clarifying that these transactions are truly loans.
The companies contacted by Consumers Union were located in the following markets: Austin, Dallas, El Paso, Fort Worth, Houston and San Antonio.
Dallas had the worst sale-leaseback culprits in the study. One of them - Advanced Cash Leasing-charges a fee of $40.24 per $100 loaned for a two-week term. The company allows rollovers, but claims its transactions are not loans. Another - Fast Buck - charged the equivalent of $64.94 per $100 for terms ranging from 3 days to 21 days, while also allowing rollovers. The company offered no disclaimer to the question of whether its transactions are "loans" or not.
Texas has set limits on interest rates since its days as a republic in an effort to prevent "loan sharking" and other abusive practices. But the report noted: "Unfortunately, loan sharking in Texas is back as lenders use loopholes in the law to increase their interest charges far above statutory caps."
CU's findings are also troublesome because none of the 21 companies surveyed offered loans in compliance with the payday lending rule adopted last year by the Office of Consumer Credit Commissioner. Instead, the companies offered cash that was "not a loan," "gift certificate" purchase, or, in one case, a straight-out loan.
"Unregulated payday lenders prey on cash-strapped people and trap them on a treadmill of debt that they cannot get off," the report said. "Such abusive lending practices provide a glimpse into what might happen if Texas were to repeal its existing usury limits for consumer loans."
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Consumers Union, publisher of Consumer Reports, is an independent, nonprofit testing and information organization serving only the consumer. We are a comprehensive source of unbiased advice about products and services, personal finance, health nutrition, and other consumer concerns. Since 1936, our mission has been to test products, inform the public, and protect consumers.
