A 2019 legal opinion by Texas Attorney General Ken Paxton enabling payday loan companies to charge sky-high interest rates came after he raked in major campaign contributions from the industry, documents obtained by the Current show.
Paxton’s ruling has been widely criticized by consumer groups, who argue it opened up a loophole in state law that subjected vulnerable borrowers to loans with annual interest rates (APRs) as high as 846%.
That ruling came after lenders potentially affected by the rule change contributed more than $10,000 to the Republican AG’s election coffers. In the days after the ruling, the industry contributed nearly $24,000 in additional campaign funds to Paxton.
“We know that the predatory lenders … have a lot of political sway,” Ann Baddour, director of the Fair Financial Services Project for nonpartisan nonprofit Texas Appleseed, told the Current. “You know, they often don’t show up at hearings, but they do their work in quiet, in the backrooms, where they make big financial contributions.”
Paxton’s 2019 ruling enabled payday lenders to skirt the state and local protections that apply to high-cost loans arranged under the Credit Services Organization Act, according to officials with Texas Appleseed.
Consumer advocacy groups further argue that the loophole Paxton created hits veterans and military families especially hard by allowing lenders to avoid the protections of the Military Lending Act, which shields service members and their dependents from high interest rates by capping them at 36%.
Paxton, who’s running as a Republican to represent Texas in the U.S. Senate, didn’t respond to the Current’s request for comment by press time.
How it started
In July 2019, the attorney general’s office received a request for an opinion from Harris County Republican State Rep. Jim Murphy, chairman of the Texas House’s Pensions, Investments and Financial Services Committee.
In his letter, Murphy asked Paxton to weigh in on whether credit services organizations (CSOs) could offer “signature” loan products that weren’t subject to regulation.
Prior to Paxton’s review, Texas payday and auto title loan businesses had created loan products that skirted state licensing requirements, according to the Texas Fair Lending Alliance. Many of those products had interest rates exceeding 500%.
Examples of such products include an ACE Cash Express offering called the “Texas Flex” loan with an 846% APR. A “personal loan” offered by TitleMax had a posted APR of 651%. Another lender, Advance America, was subject to state regulatory action in 2018 for a loan that was structured to avoid regulations for payday loans under Texas law.
Paxton’s ruling opened the gate for credit service organizations (CSOs) to compete with regulated lenders with “signature loans” of their own, including high fees that weren’t subject to Texas’ existing regulations for payday lending.
The loophole was based on a 2004 5th Circuit ruling in the case Lovick v. Ritemoney Ltd., which asserted that as long as the CSO — serving as third-party loan broker — and the lender didn’t share money, such a loan product wasn’t legally considered usury.
The lender could collect the interest and the CSO could collect the fees, without the fees being considered “disguised interest.” But the fees —which can run as high as $20 per every $100 borrowed and tacked on every two weeks — added up, and in turn, caused APRs to skyrocket.
Paxton’s payday
After being asked to weigh in on the matter, Paxton’s office took five months to issue the opinion. During that time, he received thousands of dollars in campaign contributions from payday lenders before handing down a ruling in their favor.
Many of the donations Paxton received from the payday loan industry in the five-month period while he deliberated were from first-time donors.
Between Sept. 6 and Oct. 23 of 2019, Paxton received $10,200 from payday lenders, according to Open Secrets, a nonpartisan group that tracks money in politics. Those donations included:
- $1,700 from Clint Harris, an e-commerce entrepreneur with eMoney USA Holdings
- $2,500 from Mark Curry, founder and CEO of financial company Sol Partners
- $1,000 from Advance America Cash Advance Centers
- $5,000 from David Johnson, a subprime lending czar based in the U.S. Virgin Islands
In 2020, Johnson’s financial services company Cane Bay Partners VI faced a RICO suit accusing it of running a nationwide usury operation in which it used a Native American tribe as a “legal shield.”
Cane Bay Partners VI specialized in lending small sums over the internet at interest rates exceeding 800%, the suit alleges.
After Paxton delivered his opinion in November 2019, he received another $23,500 in campaign contributions from the industry the following month, according to documents obtained by the Current.
Those included:
- An additional $10,000 from fintech entrepreneur Mark Curry
- $2,500 from Michael Hodges, founder of payday lender Advance Financial
- $1,000 from Sarah Cutrona, general counsel of Elevate, a Texas-based payday lender
- $10,000 from Trevor Ahlberg, owner of payday loan chain Cash Store and a major GOP donor
Ahlberg has donated close to $1 million to Texas politicians and causes since 2009 through his Irving-based firm Cottonwood Financial, including $25,000 to the Texas for Greg Abbott PAC in 2018. According to Texans for Public Justice’s Lobby Watch, Ahlberg is “the industry’s top contributor to most of the politicians who are most indebted to the predatory-loan industry.”
Texas families pay the price
While Paxton deliberated and the money flowed in, consumer advocates cautioned his office that opening a loophole for payday lenders would be disastrous for struggling families.
In September 2019, the Consumer Credit Commissioner, the Texas Catholic Conference of Bishops, the Texas Christian Life Commission and the City of Austin filed briefs with the office asking to retain the existing limits on CSOs’ offerings.
“This Attorney General opinion could open the floodgates for new uncapped lending with no state oversight, leaving Texans vulnerable to abusive lending practices,” Baddour said in a statement ahead of the opinion. “Payday and auto title loan businesses already charge rates in excess of 500% APR. Texas needs to rein in abusive lending, not open more loopholes.”
The following month, the American Financial Services Association sent Paxton a letter warning him that if he affirmed the industry’s request, he would “foster unlicensed lending activity, increasing the risk […] of predatory lending.”
“This would not only put consumers at risk, but also create a competitive disadvantage for
regulated lenders in Texas,” Danielle Fagre Arlowe, senior vice president of state government affairs for AFSA, wrote in the letter.
A coalition called the Texas Fair Lending Alliance joined with Texas Faith Leaders for Fair Lending to push back on Paxton’s opinion once he finally issued it. The coalition argued the ruling appeared to contradict a 2011 law passed by the Texas Legislature that requires licensing of payday and auto-title loan businesses. The same law established basic oversight and transparency requirements for high-cost loans.
Paxton’s 2019 opinion allowing for signature loan products didn’t require data reporting on such offerings.
“And so it’s definitely hiding what’s happening in the market in some ways with the data reporting,” Baddour told the Current. “There’s this whole segment of the market that we don’t know about.”
Baddour and other consumer advocates rely on a dashboard to monitor trends in the industry. The lack of transparency caused by the 2019 loophole makes it harder for them to analyze the data on CSOs’ signature loans and protect those affected, she added.
“We know that these are really abusive products,” Baddour said. “Are they targeting the military? I don’t know. Nobody’s watching. Are they violating debt collection laws? I don’t know. Nobody’s watching.”
The 2019 loophole also worked around existing local ordinances in 49 cities meant to protect residents from payday-loan-friendly state regulations.
Following Paxton’s 2019 opinion, Austin, Dallas and the small North Texas municipality of Reno rewrote their anti-usury ordinances to close some of the loopholes Paxton opened. In Dallas, the fight over its anti-payday loan ordinance went all the way to the Fifth Circuit Court of Appeals.
San Antonio also had an existing anti-usury ordinance to protect its residents from payday loans, originally spearheaded in 2012 by then-Councilman Diego Bernal, who now serves in the Texas House. However, the city didn’t update the rules in time to account for Paxton’s new loophole.
The Texas Legislature’s 2023 “Death Star” bill blocked municipalities such as San Antonio from passing new ordinances that contradict state regulations, including those related to finance.
In 2018, Texas Appleseed’s analysis of data reported to the Texas Office of Consumer
Credit Commissioner — a state financial services regulator — found that the average APRs for payday and auto title loans ranged from 204% to 523%. On average, Texans who borrow from such lenders repay more than $1,200 when taking out a $500 loan, according to the analysis.
Industry experts who spoke to the Current described situations in which customers borrowed small amounts of $500 or $1,000 to cover utility bills or groceries, only to end up owing more than $3,000 as the debt ballooned out of control.
From 2012 to 2018, payday and auto title loan operations collected $11.2 billion in fees from
struggling Texas families, according to Texas Appleseed.
A 2018 survey of Texas veterans found that 76% who had obtained a payday or auto-title loan struggled to repay it when it came due, while 77% struggled to pay other bills because of the outstanding uncapped loans.
“As a Pastor, I have met hundreds of people in my church and community who were trapped in
these unaffordable loans, losing cars, homes, and their mental and emotional well-being. This new opinion will likely make things worse for our community members,” Rev. Wes Helm, former faith in formation manager at Faith in Texas, said in a Nov. 2019 press release immediately denouncing the opinion.
On the phone with the Current, Stephanie O’Banion, director of statewide initiatives for United Ways of Texas, said the problem has only gotten worse since 2019 as she and other consumer advocates continue to fight predatory lending at the state level.
“What I’ve seen on the advocacy team for payday and auto title lending is that we find ourselves every session in a defensive position just trying to hold,” O’Banion said. “We’re just trying to hold and not let it get any worse. We’ve not been successful in making them better. And I think we will always be up against new loopholes.”
Texas politics is a mess. We make it a readable mess.
Sign up for San Antonio Current’s new “Texas Politics This Week” newsletter.
Sign Up for SA Current newsletters.
Follow us: Apple News | Google News | NewsBreak | Reddit | Instagram | Facebook | Twitter | Or sign up for our RSS Feed
