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Lender group files suit against city

Profile image for By Peggy Heinkel-Wolfe / Staff Writer
By Peggy Heinkel-Wolfe / Staff Writer

The Consumer Service Alliance of Texas, a trade group representing payday and auto title lenders, filed suit this week against the city of Denton, seeking to block the city’s new ordinance regulating those businesses.

On March 19, the Denton City Council approved new rules that restricted short-term lenders in ways similar to ordinances passed recently in Austin, El Paso, Dallas and San Antonio. Denton modeled its ordinance after the one adopted in Dallas, which withstood a legal challenge from the alliance earlier this year.

City Attorney Anita Burgess confirmed that the city was served with the lawsuit on Tuesday. The suit was filed in a Denton County district court on April 5. She declined to comment at length, saying only that the city was reviewing the matter and would provide a timely response to the court.

Mayor Mark Burroughs said the lawsuit wasn’t a surprise, given that Dallas was sued for its ordinance.

“But I still think it was the right thing to do at the time we did it, and it accomplishes our purpose,” Burroughs said.

“And it sends a message at a state level, at a very appropriate time, that puts Denton in the books as to how the City Council feels about the practice,” he added, referring to proposed legislation awaiting a vote in the Texas Senate.

Denton’s ordinance was written to apply only to those storefronts that are operating under laws that regulate “credit-access businesses.” It does not affect those operating exclusively as pawnshops or as consumer lenders licensed in another part of the Texas Finance Code.

Deputy City Attorney John Knight has said previously it appeared many of the storefronts in the city would not be compliant with the new rules, which carry with them criminal penalties.

Denton has at least 39 businesses, most clustered in poorer neighborhoods, that offer payday, title and other short-term loans. Of the 39 small lenders, seven are licensed as pawnshops, 17 as credit-access businesses and 13 appear to be operating under Chapter 342 of the Texas Finance Code, which governs consumer lending.

According to court documents, the trade alliance claims to represent its member businesses, although it is unclear from the lawsuit and the alliance’s website which Denton businesses are members of the association.

Consumer Service Alliance spokeswoman Julie Hillrichs said in an e-mail Thursday that the group’s membership list is private.

Through the lawsuit, the alliance seeks temporary and permanent injunctions to stop Denton from enforcing its new rules.

Court records show that the trade association claims its members will suffer irreparable harm, including having to “reinvent their business plans, restructure loans, re-format and re-print loan documents, re-format and re-write websites, and forego arranging credit for customers.”

In the original petition, the alliance tells the court it is willing to post a bond for a temporary injunction. A preliminary hearing has not been set.

The lawsuit also claims Denton’s ordinance is pre-empted by a 2011 state law giving the businesses the authority to operate as they do.

The alliance’s attorney, Michael P. Lynn of Dallas-based Lynn Tillotson Pinker & Cox, did not immediately return a call for comment Thursday.

Some critics have claimed lenders are operating under a loophole that allows storefronts to charge fees that make the cost of borrowing predatory. According to state reports, 70 percent of Texans are unable to repay a short-term loan during the original term.

On average, it costs about $840 for the average Texan to repay a $300 loan.

Denton’s new ordinance requires lenders to structure their loan repayments in no more than four installments, each of which must pay down 25 percent of the loan amount. Any extension of a loan that is supposed to be repaid in a lump sum may not be refinanced or renewed more than three times. The proceeds from each refinancing must pay down at least 25 percent of the original loan.

The credit storefronts would also be limited in the amounts they can loan in Denton, depending on the value of what is pledged. For example, a cash advance that is guaranteed by a car title could not exceed 70 percent of the vehicle’s value or 3 percent of the individual’s annual gross income — whichever is less. Other cash advances couldn’t exceed 20 percent of the borrower’s monthly gross income.

Advocates, many Texas cities and the lenders are battling new legislation meant to reform the industry’s practices in Texas, with most of the attention currently focused on Senate Bill 1247.

The bill, sponsored by state Sen. John Carona, R-Dallas, seeks to close the lending loopholes and pre-empt Texas cities from adopting ordinances, other than zoning, that would regulate the storefronts.

But a substitute version of the bill, passed out of committee with a 5-3 vote with one member absent, would put fewer new restrictions on lenders and their storefronts. Yet, the bill left intact the pre-emption provision.

SB 1247 is awaiting consideration by the full Senate.

PEGGY HEINKEL-WOLFE can be reached at 940-566-6881 and via Twitter at @phwolfeDRC.