The Credit Services Organization (CSO) model is the business model that payday loan companies operate under in the State of Texas.
The CSO is defined by the Texas Credit Services Organization Act and Section 393 of the Texas Finance Code. The code defines a CSO as an entity that provides services that improve a consumer’s credit rating, obtain an extension of credit for the consumer, or provides assistance to a consumer regarding credit improvement or extensions of credit.
In reality, all payday lenders in Texas are not true payday lenders. They do not sell a traditional payday loan compared to other states, and, in contrast, they call themselves CSO’s. In Texas, a registration certificate is required and allows payday loan businesses to act, more specifically, as brokers who arrange for a consumer to receive a loan from a particular Third Party.
The customer pays fees to the CSO for arranging the loan in an amount typical to the industry, $20 per $100 for example. On the contrary, there is no limit to what can be charged by the CSO. The Third Party, called the lender, issues the money to the consumer and is paid interest for that loan of usually just under 10 percent APR.
Why do all companies in the payday loan business in Texas operate under this model? After this creative business model launched it quickly landed in court as Lovick v. Rite Money. The case was heard in the U.S. Fifth Circuit Court of Appeals, where an opinion was issued, which held that payments made to the CSO were not to be considered interest. The model was deemed viable, and once word spread about the ruling and the viability of the CSO model, companies began adopting it and expanding rapidly.
Lending was easy under the CSO model when all that was needed was a registration certificate and a Third Party lender to sell loans. After the new laws, House Bills 2592 and 2594, were passed in 2011, adopted regulations changed the payday loan business. Now called the Credit Access Business (CAB), payday loan businesses are required to have a new license, pay more fees, and operate in compliance with a new set of required notices, and disclosures.
The new laws go into effect on January 1, 2012. At that time, CSO’s must have their CAB license in place alongside the new required consumer notices and disclosures in order to be compliant.