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Regulated Lender Activity Report
OFFICE OF C ONSUMER C REDIT C OMMISSIONER
I. Executive Summary _________________________________________ 1 II. Agency Overview __________________________________________ 2 Regulatory Responsibilities____________________________________ 2 III. Lender Activity ___________________________________________ 5 Explanation of Annual Report Data _____________________________ 5 Overall Industry Profile ______________________________________ 5 Mortgage Loans ____________________________________________ 7 Payday Loans _____________________________________________ 11 Signature Loans ___________________________________________ 13 Secured Consumer Installment Loans___________________________ 15 Motor Vehicle Sales Financing ________________________________ 17 Pawnshop Transactions _____________________________________ 19
I. E XECUTIVE S UMMARY
The year 2002 was overall a healthy one for OCCC licenses. Industry assets, as an aggregate figure, increased 62% over the 2000 figure (from $442 billion to $708 billion). Lower rates lent themselves to more mortgages Both first and second lien home equity loans showed dramatic increases from 2001 in the number of loans made, dollar amount loaned, and average amount of the loans. These increases may indicate the borrowers took advantage of lower interest rates and the equity in their homes to pay off higher interest debt, buy new homes, or make improvements on existing property.
&#216; In 2001, $191,993,120 in second lien home equity loans were made with an average loan of
$32,735. The year 2002 saw $753,966,127 in second lien home equity loans made, with the average loan amount more than double at $65,849.
&#216; In 2001, $3,003,634,029 in first lien home equity loans were made, an amount that
increased by 228% in 2002, reaching $6,854,394,325. The average loan in 2002 was $102,893, an increase of 35% over the 2001 figure.
Payday loan activity continues to increase The number of regulated loan licenses issued to payday lenders steadily increased, from 205 at the end of 2000 to 979 at the end of 2002. Lenders that use out-of-state rates continue to outstrip lenders that use Texas rates by an average ratio of 20 to 1 in both number of locations and number of loans made. Interestingly, the average loan amount of loans made with Texas rates has decreased from $209 in 1999 to $153 in 2002. During that same time period, the average loan amount for rate exporters has increased from $299 to $340. Signature loans greater in amount, fewer in number The predecessor to payday loans, signature loans have seen an increase in average loan amount from 1998 to 2002, reaching $345 for 2002. However, during that same five-year period, the number of loans made peaked in 2000 at 4,721,479 but dropped to 4,215,622 for 2002. Consumer installment loans secure in lending industry Consumer installment loan activity has remained relatively stable over the past few years, although with a slight increase in the amount of the average loan from $4,322 in 2000 to $5,084 in 2002. Pawnshop transactions on the rise Pawnshop loan activity increased in both number and amount from 2000 to 2002. The average loan amount rose from $69 to $89. These increases are hardly surprising, given the economic downturn of that period.
OCCC Regulated Lender Activity Report for Calendar Year 2002
In the midst of economic fluctuations and technological changes, the OCCC seeks innovative ways to serve the needs of the consumer and the lender. Exciting promise for change in the consumer credit environment appears close on the horizon. The OCCC will embrace that change and continually improve service to Texas citizens with the same dedication that has long been the hallmark of this agency.
Since 1967, the OCCC has regulated non-depository creditors in Texas. Over the years, that oversight has broadened from only two types of small consumer loans to include home equity and secondary mortgage lenders, finance companies, payday lenders, signature loan companies, motor vehicle sales finance companies, pawnshops, and retailers that finance the sales of their goods and services. The agency works to ensure that the multi -billion dollar credit-granting industry adheres to the various laws regulating credit transactions. Regulation maintains a level playing field for lenders and assists them in avoiding the risk factor inherent in noncompliance. This dynamic and diverse industry ranges from small, independent lenders to publicly-traded corporations. Transactions range from relatively simple one-time payday loans to complex, document-intensive thirty-year mortgages. Following is a description of each kind of transaction the agency regulates. Real Estate-Related Transactions &#182; Home Equity Loans: A home equity loan allows a borrower to use the market value of their home as collateral for a loan. Loans secured by real estate generally are considered by lenders to hold less risk, resulting in lower interest rates than for other types of loans. A home equity loan can hold either first lien position (the only or primary loan secured by the property) or second lien position (in addition to federal tax debt or an existing mortgage, such as the loan taken out to purchase the home). Interest rates are determined by market demand, with terms ranging from five to thirty years. &#182; Secondary Mortgages: Also known as a second lien or junior lien mortgage, a secondary mortgage is secured by real estate that already has at least one other mortgage or lien in place. These loans are regulated according to Chapter 342.G of the Texas Finance Code, with its interest rate cap of 18%. Like home equity loans, secondary mortgages have terms running from five to thirty years, depending upon principal amount, interest rate, and desired payment. &#182; Home Improvement Loans: Home improvement loan proceeds are used for home repairs and renovations. These loans are generally taken out as second mortgages and are therefore subject to regulation under Chapter 342.G.
Secured Transactions &#182; Motor Vehicle Sales Financing: A consumer buying a motor vehicle without paying the full price in cash generally enters into a retail installment contract. This contract allows the consumer to pay the balance due over time. Interest rates in 2002 were capped at 18% for new vehicles, 22.32% for used vehicles up to four years old, and 26.62% for 1997 and older vehicles. Terms range from twelve to eighty four months. Companies that finance motor vehicle sales in Texas need to be licensed by the OCCC as of September 1, 2002. The requirement extends both to dealers that provide financing themselves and to dealers that arrange financing with lenders for their customers. The finance companies that provide financing to dealers’ customers must be licensed as well. &#182; Pawnshop Transactions: Pawnshops make loans in exchange for keeping collateral onsite in the shops. Borrowers that pay back their loans within 60 days may reclaim the items left as collateral. If they choose not to repay, the pawnshops keep the items for retail re-sale. Interest rates in 2002 ranged from 240% for loans under $150 to 12% for loans from $1,500 to $12,500. &#182; Consumer Installment Loans: These are secured loans that a borrower pays off in multiple installments. Loans are secured by consumer goods such as cars and large appliances. Loan amounts in 2002 typically ranged from $500 to $12,500 with terms ranging from 12 to 36 months depending upon the amount borrowed and the monthly payment desired. Unsecured Transactions &#182; Signature Loans: Signature loans are unsecured loans, meaning that the borrower pledges no collateral but receives a loan upon putting a signature to an agreement. Lenders in 2002 generally granted up to $500 for signature loan amounts with terms of approximately six months. &#182; Payday Loans: Payday loans are typically made for up to $500 and usually require payment in two weeks or less. The borrower writes a check as security for the loan with the understanding that the lender will not present the check for deposit until a predetermined date (usually the borrower&#39;s next payday). Therefore, terms are generally two weeks or less. The Texas Finance Code permits interest rates ranging from 73% to 300% for payday loans. However, lenders in Texas, acting as brokers for out-of-state banks, can use exported rates ranging from 200% to 1,000% APR. Credit Sale Transactions &#182; Retail Credit Accounts: Some retailers act as creditors, financing the sales of their goods and services and thus allowing their customers to make payments over time. These creditors include boat dealers, manufactured home dealers, furniture and carpet retailers, home improvement companies, air conditioner sales and service companies, some medical offices, and similarly structured businesses. These creditors are not
required to be licensed by the OCCC, but must register with the agency each year. Providers of manufactured home sales financing are authorized as creditors under Chapter 347 of the Texas Finance Code; interest rate ceilings are generally set at the federal level of regulation. All other registered creditors fall under the authorization of Chapter 345; the effective interest rate is capped at 22%. There are no maximum principal amounts for either type of registered creditor. Credit and property insurance are allowable charges on these retails accounts. In contrast to the rigors of the licensing process, r egistration consists of creditors providing basic contact information for their locations, indicating their primary business activity, and paying a small administrative fee. Having this information on file gives the OCCC a means to notify these businesses when there are credit law changes that affect the businesses. Unlike licensees, registered creditors are not required to provide the OCCC with annual report data and so the agency has no means of tracking their business volumes or industry trends. &#182; Revolving Credit Accounts: Usually made by the same lenders that make consumer installment loans, this financing arrangement provides a line of credit to be used for a specific purpose; the most common use takes the form of retailer-specific credit cards. Effective interest may reach 18% and there is no ceiling on the loan amount. Permissible charges on these accounts (according to the Chapter 346 authorization) include annual fees, charges for late payments and cash advances, and fees for returned payment checks and exceeding credit limits. However, lenders may not assess interest charges on fee amounts. The use of revolving credit has decreased over recent years, and will likely continue to decline as other financial products develop and meet the needs of these borrowers.
III. L ENDER ACTIVITY
This section of the report provides snapshots of the credit industry activity in Texas as well as a portrait of each regulated sector’s development. Concomitant with the industry’s activity is the OCCC’s activity, also described here, as the agency responds to new credit trends and helps shape future transactions. Those transaction types are defined and detailed in this section, including a comprehensive list of governing statutes and accompanying administrative rules, which assist in the administration and enforcement of the statutes. &#182; Mortgage Loans &#182; Payday Loans &#182; Signature Loans &#182; Consumer Installment Loans &#182; Motor Vehicle Sales Financing &#182; Pawnshop Transactions
Explanation of Annual Report Data
The TEXAS F INANCE CODE , Section 342.559 requires these licensed lenders to annually submit key financial information to the OCCC. Data must be provided by May 1 for the previous calendar year. The agency does not have the resources to officially audit the reports for accuracy. However, upon receiving the information, the OCCC enters the information into a database and reviews it for reasonableness. The information is reported at the company level, and is not location specific; therefore, the data can be presented only on a statewide basis. Also, this presentation does not represent all retail installment transactions, because most are conducted by sellers not required to report to the OCCC. Further, the information does not represent all consumer loans made in Texas during 2002, since the OCCC does not regulate depository institutions (i.e., banks, credit unions, and savings and loan institutions) and therefore cannot provide those activity figures. Additionally, some lending activities are not regulated in Texas, such as reverse mortgages, first lien transactions (except home equity), and loans made below the constitutional maximum rate charge of 10%.
Overall Industry Profile
The following chart provides financial information about the size of the industry. The $708 billion industry employs people in essentially every community statewide. This industry serves consumers across the state as well. Texas borrowers accrued nearly $3 billion in interest last year on loans regulated by the OCCC. Interestingly, while the overall industry assets figure has increased 62% since 2000, (from $442 billion to $708 billion), the bad debt figure has actually decreased since that time to $446 million from $507 million. Because the annual report totals represent multiple types of loans,
however, the bad debt figure resists further analysis, particularly in relation to a specific type of loan.
Overall Licensee Data
Total assets Income from interest (all loans made) Bad debts Number of companies reporting*
*A company may have more than one license.
$708,001,799,342 $2,943,361,826 $446,907,811 7,542
Mortgage activity has long been used by economists as an economic indicator. With regulatory oversight of home equity loans and secondary mortgages, the OCCC hopes that its data presentation will contribute meaningfully to an understanding of economic conditions in Texas.
This segment of the report describes in detail the real estate-related transactions regulated by the OCCC. Home equity loans A home equity loan allows a borrower to use the market value of a home as collateral for a loan. Loans secured by real estate generally are considered by lenders to hold less risk, resulting in lower interest rates than for other types of loans. A home equity loan can hold either first lien position (the only or primary loan secured by the property) or second lien position (in addition to federal tax debt or an existing mortgage, such as the loan taken out to purchase the home). Interest rates are determined by market demand, with terms ranging from five to thirty years. The rates on second lien home equity loans are generally higher than those for first lien home equity loans, however. A first mortgage home equity loan allows a consumer to refinance an existing mortgage and receive cash (traditionally called a Cash Out Refinance). Home equity loans usually have lower interest rates than do other types of consumer loans, except first mortgages. Closing costs are capped at three percent (3%) of the principal amount borrowed. Home equity loans were authorized by Texas voters in 1997; the 75th Legislature added the necessary amendment to the Texas Constitution. A consumer protection feature included in that amendment is the 12-day waiting period that must lapse from the time an application is taken and the borrower receives a mandated consumer rights notice to the time of closing. For example, if a potential borrower submits an application on Monday, but doesn’t receive a copy of the consumer rights notice until Wednesday, then the 12-day countdown would begin on Wednesday. Once the waiting period has passed, the loan can be closed. Other consumer protections added at that time include a minimum wait to refinance of one year and a limit on the principal of 80% of the home’s value. The consumer protections built into home equity laws have protected Texans from many of the predatory lending problems faced by other states. Governing statutes, administrative rules, and commentary &#182; Article 16, Section 50(a)(1)-(7) of the Texas Constitution &#182; Title 7, Part 1, Chapter 5 of Texas Administrative Code
&#182; Title 7, Part 1, Chapter 1, Subchapter G of Texas Administrative Code (applicable to second lien home equity loans) &#182; Title 7, Part 1, Chapter 1, Subchapter Q of Texas Administrative Code (plain language contract rules and model contracts for second lien home equity loans) &#182; Home Equity Commentary (drafted by the OCCC to express the enforcement positions adopted by the financial regulators of Texas and recognized by Fannie Mae and the Texas Supreme Court) Secondary mortgages and home improvement loans Also known as second lien or junior lien mortgages, secondary mortgages are secured by real estate that already has at least one other mortgage or lien in place. Borrowers might take out secondary mortgages for home improvement or other large one-time expenses. A secondary mortgage is sometimes used in the initial home purchase transaction to allow the buyer to avoid paying for private mortgage insurance (PMI), an expense almost always incurred in a conventional loan when the borrower owes more than 80% of the home’s value. PMI protects the lender from the expense of foreclosing on the property if the borrower defaults. By taking out a secondary mortgage from a different lender to serve as a 10% or 20% down payment to the lender of the primary mortgage (a practice referred to as piggybacking), the borrower then avoids the cost of PMI. The borrower then has to make the second mortgage payments but they provide tax benefits, unlike PMI payments. Purchase money loans most often hold only the first lien position, however. First lien purchase money loans are largely unregulated in Texas, as are first lien refinancings, as long as there is no cash out to borrowers. Effective interest rates for secondary mortgages are capped at 18% with no maximum loan amount. Like home equity loans, secondary mortgages have terms running from five to twentyfive years, depending upon principal amount, interest rate, and desired payment. Credit and property insurance are allowed charges on the contract and can be made part of the amount on which lenders assess interest. Governing statutes and administrative rules &#182; Chapter 342.G of Texas Finance Code &#182; Title 7, Part 1, Chapter 5 of Texas Administrative Code &#182; Title 7, Part 1, Chapter 1, Subchapter G of Texas Administrative Code &#182; Title 7, Part 1, Chapter 1, Subchapter Q of Texas Administrative Code (plain language contract rules and model contracts)
In regulating this ever-evolving market sector, the OCCC seeks to maintain and create consumer protections while allowing for industry development. A vital component of the
OCCC philosophy is communication with and education of both the credit industry and credit users. This philosophy informs the direction of the agency’s initiatives, all of which have the common goal of seeking to clarify and inform. &#182; Home Equity Commentary: The agency went into action as soon as home equity loans were authorized in 1997, working in concert with the Department of Banking, Savings and Loan Department, and the Credit Union Department to create the Home Equity Commentary. This document expresses the enforcement positions adopted by those regulatory agencies, answering many questions before they were even asked. The Home Equity Commentary continues to serve as a valuable reference document for lenders and consumers. &#182; Plain Language Contracts: The OCCC is developing plain language model contracts in Spanish and English for all of the lenders it licenses by working with a drafting committee of attorneys who represent both consumers and lenders. The use of plain language has dramatic effects on a contract’s readability: one clause in the model contract for second lien home equity loans went from 139 words to 42 while becoming five times more readable; the reading level dropped from twelfth-grade to sixth. &#182; Online Mortgage Lending Resources: The OCCC provides mortgage lending resources for consumers in Spanish and English on its Web site. The agency assembled loan comparison worksheets, mortgage shopping and application tips, online calculators, relevant statutes, copies of required disclosures, and printer-friendly versions of its own public service announcements to provide homeowners with the up-to-date information they need to make informed decisions.
Industry Activity Reported For CY2002
Number of 2nd lien home equity loans Dollar amount loaned Average loan amount Number of 1st lien home equity loans Dollar amount loaned Average loan amount Number of 342.G loans Dollar amount loaned Average loan amount 11,450 $753,966,127 $65,849 66,617 $6,854,394,325 $102,893 15,704 $740,497,774 $47,153
Number of 2nd lien home equity loans Dollar amount loaned Average loan amount Number of 1st lien home equity loans Dollar amount loaned Average loan amount Number of 342.G loans Dollar amount loaned Average loan amount 3,543 $173,012,930 $48,832 10,093 $1,278,641,501 $126,686 3,779 $264,794,327 $70,070
Relatively new to the Texas credit industry, the payday loan industry has garnered a considerable amount of media attention because of the lending partnerships created with national and out-of-state banks. The OCCC has served as a valuable resource for the media and for other regulatory agencies seeking information about payday lending volumes and practices.
Payday loans are typically made for up to $500 and usually require payment in two weeks or less. The borrower writes a check as security for the loan with the understanding that the lender will not present the check for deposit until a predetermined date (usually the borrower&#39;s next payday). If a borrower realizes that they need more time to repay the original principal, the borrower can refinance the remaining principal as a new loan, a transaction known as rolling over the loan. In fact, many borrowers do roll over their original loan amounts. At the national level, studies of borrower loan records by state regulators find that 50 to 80% of payday loan customers enter into seven or more loan transactions at one lender over the course of a year and 20 to 30% of the customers enter into 14 or more. Texas statute permits interest rates ranging from 73 to 300% for payday loans. Texas lenders using an out-of-state bank or national bank to fund the loans—essentially acting as brokers for the foreign entities—can take advantage of federal preemptions to charge anywhere from 200 to 1,000% APR. Lenders using the Texas rates may also assess an acquisition charge of $10. That charge is paid in addition to any interest. A lender may assess that charge only once a month, even if a borrower renews or rolls over a loan more than once during a month. Lenders using out-ofstate banks to fund payday loans do not assess acquisition charges separately from the interest amount calculated but roll them into the total amount due in addition to the principal. Governing statutes and administrative rules &#182; Chapter 342.F of Texas Finance Code &#182; Title 7, Part 1, Chapter 1, Subchapter A of Texas Administrative Code &#182; Title 7, Part 1, Chapter 1, Subchapter F of Texas Administrative Code
In 2000, the Finance Commission of Texas and the OCCC first set administrative rules that allowed payday lenders to operate under the signature loan chapter (342.F) of the TEXAS F INANCE CODE, with its inherent interest rate limitations. The 77th Texas Legislature affirmed in
2001 those rules and strengthened the provisions by closing loopholes that might have allowed lenders to disguise payday loans as other transactions. The agency is vigilant in seeking to identify and address permutations of the transaction that evade the usury provisions of Texas law. For example, some variations on cash advance scenarios deviate from the payday loan structure by bundling loan products with overpriced services. These abusive or illegal lending schemes are often subterfuges cl oaking illegal, usurious loans. The OCCC thoroughly investigates these transactions as they come to light.
The practice of exporting rates for payday loans has increased steadily. In May 2002, the number of active payday licensed locations using exported versus in-state rates was 885 to 40. By March 2003, those figures had shifted further: 1,011 exporters to 50 in-state. For perspective, an overview of payday lending activity since 1999 is included as well.
Payday Loans Made
Number of loans Dollar amount loaned Average loan amount 80,122 $12,271,792 $153
Payday Loans Brokered
Number of loans Dollar amount loaned Average loan amount 1,125,807 $382,558,063 $340
Number of Payday Loans CY99-02
13,178 32,874 31,211 353,903 437,398 786,406
2000 Loans Made
In an August 2002 letter to the editor of the Houston Chronicle, a Consumers Union representative proposed that signature loans provide a cheaper alternative to payday loans. Despite their relatively high interest rates, signature loans do offer lower rates than do payday loans with the added benefit of longer repayment terms in which each payment reduces the original principal. Signature loan legislation also offers greater consumer protections.
Signature loans are generally unsecured loans, meaning that the borrower pledges no collateral but receives a loan upon putting a signature to an agreement. Lenders in 2002 generally granted up to $500 for signature loan amounts with repayment within six months. If the borrower cannot pay off the loan within the established term, the remaining principal can be refinanced as a new loan, a transaction known as rolling over the loan. The interest rate cap is 240% with an allowable late charge of 5% of the payment due. Chapter 342.F prohibits lenders from adding additional charges (such as credit insurance) to these loan contracts. Governing statutes and administrative rules &#182; Chapter 342.F of Texas Finance Code &#182; Title 7, Part 1, Chapter 1, Subchapter A of Texas Administrative Code &#182; Title 7, Part 1, Chapter 1, Subchapter F of Texas Administrative Code &#182; Title 7, Part 1, Chapter 1, Subchapter Q of Texas Administrative Code (plain language contract rules and model contracts)
The OCCC’s plain language initiative began with signature loans. Working with a drafting committee of attorneys who represent both consumers and lenders, the OCCC developed a plain language model contract that was adopted at the February 2002 Finance Commission meeting. A before-and-after comparison of the signature loan’s traditional and plain language contract yields some impressive numbers. For example, the following example of plain language version of a sample sentence has only nine fewer words but more than doubles the score on the Flesch-Kincaid readability test, earning it a fifth-grade reading level designation (as opposed to the twelfth-grade or above designation the traditional version has).
When any portion of a scheduled installment remains unpaid after the 1 0th day after the date on which the installment is due, the sum of 5 cents for each $1 of such installment may be assessed and collected as an additional charge.
If I don’t pay an entire payment within 10 days after it is due, you can charge me a late charge. The late charge will be 5% of the scheduled payment.
This plain language model contract has already been translated into Spanish; that translation is available on the OCCC Web site, as are all the adopted and proposed contracts.
The signature loan industry does face some competition from payday lenders. Both types of loans had maximum principal amounts of $500 in 2002, but the signature loan process and lending environment differs greatly from that of the payday loan. Signature loan companies tend to operate in downtown or urbanized areas and the transaction—both initial application and monthly payments—takes place in those physical locations. In contrast, payday lenders tend to be located in more suburban settings, such as strip malls, and both the loan application and the payments can be arranged over the phone. Another point of departure is the use of credit reports: signature lenders run credit reports on about 60-70% of the borrowers while payday lenders rarely run them at all. Signature loans offer borrowers a longer time to pay off their loans as well as lower interest rates; the industry been observed using these loan features as marketing tools to win back some of the market share lost to the convenience of payday loans.
Signature Loans Made
Number of loans Dollar amount loaned Average loan amount 4,215,622 $1,455,489,012 $345
Lenders that offer consumer installment loans often also offer revolving credit products (authorized by Chapter 346 of the Texas Finance Code), typically a line of credit to be used for specific purposes. The use of revolving credit has steadily decreased over the last few years, and will likely continue to decline as other financial products develop and meet the needs of these borrowers.
Consumer installment loans are generally secured by personal property, such as cars or large appliances. Lenders in 2002 generally granted from $500 to $12,500 for these loans. Governing statutes and administrative rules &#182; Chapter 342.E of Texas Finance Code &#182; Title 7, Part 1, Chapter 1, Subchapter A of Texas Administrative Code &#182; Title 7, Part 1, Chapter 1, Subchapter E of Texas Administrative Code &#182; Title 7, Part 1, Chapter 1, Subchapter Q of Texas Administrative Code (plain language contract rules and model contracts)
The consumer installment loans were the second transaction to benefit from a conversion to plain language. Adopted by the Finance Commission’s June 2002 meeting, the model contract rules became effective on September 5, 2002.
Consumer installment loan activity has remained relatively stable over the past few y ears, although with a slight increase in the amount of the average loan from $4,322 in 2000 to $5,084 in 2002. Clearly, however, Chapter 346 loan activity has decreased significantly in that time.
Consumer Installment Loans Made
Number of loans Dollar amount loaned Average loan amount 366,282 $1,862,293,337 $5,084
Chapter 346 Loans Made
Number of loans Dollar amount loaned Average loan amount 30,631 $78,708,186 $2,570
Consumer Installment Loans and Chapter 346 Loans Made: CY 2000 v. 2002
366,282 78,597
Chapter 346 loan
Motor Vehicle Sales Financing
A significant and historic development in the agency’s regulatory activities occurred in 2001: the 77th Legislature dramatically increased the OCCC’s authority over motor vehicle sales financing activities in Texas. With this expanded authority, the OCCC can better protect consumers and ensure that motor vehicle sales finance companies comply with credit laws. The agency believes the regulation will help strengthen the industry and boost consumer confidence.
A consumer buying a motor vehicle without paying the full price in cash generally enters into a retail installment contract. This contract allows the consumer to pay the balance due over time. Interest rates are calculated using a formula found in Section 348.104 of the Texas Finance Code and expressed as equivalent annualized percentage rates. Those rates in 2002 were capped at 18% for new vehicles; rate caps for used vehicles vary based on vehicle age and loan terms: 22.32% for used vehicles up to four years old, and 26.62% for 1997 and older vehicles. Chapter 348 does not specify maximum principal amounts. Terms generally range from 12 to 84 months. A dealer may add charges to a retail installment contract for insurance products and extended warranties; the lender may include those charges in the amount on which interest is assessed. As of September 1, 2002, companies that finance motor vehicle sales in Texas need to be licensed by the OCCC. The requirement extends both to dealers that provide financing themselves and to dealers that arrange financing with lenders for their customers. The finance companies that provide financing to dealers’ customers must be licensed as well. Governing statutes and administrative rules &#182; Chapter 348 of Texas Finance Code &#182; Title 7, Part 1, Chapter 1, Subchapter R of Texas Administrative Code &#182; Title 7, Part 1, Chapter 1, Subchapter S of Texas Administrative Code &#182; Upcoming: Title 7, Part 1, Chapter 1, Subchapter Q of Texas Administrative Code (plain language contract rules and model contracts)
During its 2000 review of the OCCC, the Sunset Advisory Commission found that the agency’s Consumer Helpline received more complaints about the financing of motor vehicles in Texas than about any other transaction type. The trend has continued: of the 52,366 calls received in FY2003 (September 2002-August 2003) by OCCC’s consumer helpline, 39.7% concerned motor vehicle sales transactions.
Although motor vehicle sales finance companies operating in Texas did register as creditors with the agency, the efficient resolution of complaints was hampered by the OCCC’s lack of enforcement tools and administrative remedies. As of September 1, 2002, motor vehicle sales financing licensure is required of dealers (whether they provide financing themselves or assign the contracts to lenders) and finance companies that accept assignment from dealers.
Impact on Licensee Growth of MVSF Licensure
Regulated Loan Licenses MV Sales Finance Licenses
Pawnshop Licenses Pending MVSF Applications
As the section responsible for processing the applications of motor vehicle sales companies, Licensing experienced the greatest immediate impact of the requirement. The number of applications received in FY2002 was 740; FY2003 saw 4,140 applications, an increase in activity of 560%.
The OCCC will not receive annual report information from motor vehicle sales finance entities until May 2005 (for calendar year 2004).
The pawnshop industry was challenged by the payday lending industry’s entrance into Texas consumer credit market. Striving to retain and create customers, many pawnshops obtained licenses to provide payday loans. As a result, under the roof of a pawnshop, a borrower might obtain either one of the newest types of loans on the market or one of possibly the world’s oldest transaction types: borrowing money based on collateral.
Pawnshops make loans in exchange for keeping collateral on-site in the shops. If borrowers pay back their loans within 60 days (a thirty-day loan term with a mandatory thirty-day grace period), they can recover the items left as collateral. If they choose not to repay, the pawnshops keep the items for retail re-sale. Interest rates are determined by the rate chart issued each year by this agency. The larger the loan, the smaller the interest rate: 240% for loans under $150; 180% for loans of $151 to $1,000; 30% for loans of $1,001 to $1,500; 12% for loans from $1,501 to $12,500 (during 2002). Governing statutes and administrative rules &#182; Chapter 371 of the Texas Finance Code &#182; Title 7, Part 5, Chapter 85 of Texas Administrative Code
In 2001 the OCCC revised the examination fee structure for pawnshops to match that of regulated lenders. A volume-based examination fee structure went into effect with the June 2002 license renewals. The previous structure consisted of an annual license renewal fee plus an hourly charge. The use of a volume-based structure provides a set fee for each pawnshop operation, payable at the time of renewal rather than at the time of examination. This fee structure provides both licensees and the agency the opportunity to budget the necessary costs of exams. Additionally, the agency was asked by the 77th Legislature in 2001 to prepare a report to recommend standards to the Legislature for the electronic transfer of pawnshop data to law enforcement agencies. A standard could make the transfer of used-merchandise information between pawnshops and police agencies more efficient and effective, potentially leading to the recovery of thousands of dollars in stolen property. Working in conjunction with the Texas Department of Information Resources, the OCCC and DIR submitted the finalized EDT report to the Legislature on June 30, 2002.
The OCCC first required annual report data from pawnshop licensees for calendar year 2000. The requirement was suggested by the Sunset Commission in that year’s review of the agency. Data gathered since that time illustrates a steady increase in pawnshop activity, most likely a result of economic downturn.
Pawnshop Loans Made
Number of loans Dollar amount loaned Average loan amount 8,689,385 $775,291,447 $89
Number of Pawnshop Loans Made CY00-CY02
8,700,000 8,689,385 8,650,000 8,600,000 8,550,000 8,500,000 8,450,000 8,400,000 8,529,428 8,617,013
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