Property Tax Lending and Payday Lending: Cities Grapple with New Issues
It’s not often that Texas cities confront unique legislative issues that haven’t surfaced session after session in the past. This 2013 legislative session presents two such issues: property tax lending and payday lending. Both are related, in that they pit aggressive loan companies, “lenders,” against sometimes struggling consumers. Why are some cities concerned? It’s because these businesses either proliferate in many communities against the wishes of the neighboring homeowners, or these business models have the serious potential to interfere with city property tax administration.
Property Tax Lending
Property tax lending is a new business practice where money is loaned to homeowners to pay their delinquent property taxes. Once the lender pays off the city property taxes, the city’s tax lien comes fully under the control of the third-party lender. Should the homeowner fall behind on the loan, the lending company has full authority to foreclose on the property with all the same rights and priorities that the city had (including superiority over mortgage liens). In fact, the lenders can use non-judicial foreclosure tools that even the city doesn’t possess.
Some cities may like this practice, though. After all, the entire business model is premised on the idea that cities get their delinquent property taxes paid in full up front. In some ways, it’s just an alternative way for a city to collect on delinquent property taxes, as opposed to suing to collect and foreclose. But many city officials are uncomfortable with this growing industry. When the city’s lien gets transferred to these third parties, the city loses all control over how aggressively to pressure these delinquent homeowners. It’s no secret that many cities are very reluctant to foreclose on residential homesteads for nonpayment of some property taxes. Those cities are free to instruct their traditional property tax collection law firms to work with willing homeowners to keep them in their home for as long as possible, especially when they show some progress in paying down their debt. With these third-party lenders, however, the city is totally powerless to influence the process. In theory, a company could fully foreclose on a home for just a minor violation of the loan terms.
A bill that would tackle this issue, S.B. 247 by Sen. Carona, passed the Senate this week by a unanimous vote. The bill would make numerous positive changes to current law, including detailed notice provisions to borrowers and substantive protections for persons who might not actually be in jeopardy of foreclosure by a taxing entity because of the possibility of payment plans or other circumstances. Also, an important floor amendment that was added to the bill ensures that city liens for substandard structure abatement must be paid by the lender before the lien can be transferred.
What S.B. 247 does not do is give the city control over whether this practice can occur within the city. This idea of local control was discussed with Senator Carona, but he decided it was best to first tackle the issue as a statewide matter. A bill has been filed in the House, H.B. 2687 by Rep. Eddie Rodriguez, that would give each city the option of whether to allow property tax liens to be transferred to third-party lenders, but that bill has not been set for a hearing. Cities that would like to see the local option feature of H.B. 2687 added to the substantive bill that is moving (S.B. 247) should contact their legislator to make their view known. In any event, cities should express their support for Senator Carona’s efforts to address aggressive property tax lending with S.B. 247.
Payday lending is a practice where a person can walk into a store, typically located in a strip mall, and take a cash advance on their next paycheck. Most such businesses offer a similar cash advance with a car’s title as collateral. The interest rates on such loans are very high, in many cases far higher than the current state law limits against usury, thanks to legal loopholes. Borrowers who fall behind on payments can refinance multiple times; meanwhile, the interest and other fees keep piling up. It’s not uncommon on the auto title lending side for people to lose their car altogether after several such refinancings.
Legislation passed in 2011 took the first tentative steps towards regulating this industry by requiring certain notices to consumers and tighter state registration of these businesses. But the 2011 legislation stopped short of substantively reigning in the practice, and that’s where cities felt compelled to step in. Some cities adopted ordinances regulating this industry because they felt that certain portions of their citizenry were being preyed upon by the proliferation of these stores in their communities. And some of those cities have been sued by the payday industry, claiming that Texas cities are preempted by state law from legislating in this area.
So far during this 2013 session, numerous bills have been filed that would expand the state’s substantive regulation of this industry. Unfortunately, some of these bills would explicitly preempt city authority over the financial aspects of the industry (some such bills would, however, preserve city zoning and health and safety authority). It is expected that some of these bills could be heard in committee as early as next week.
The bottom line with payday lending is this: cities are encouraged to express support to their legislators for substantive, statewide regulation of this practice if it’s something that the city cares about (not all cities do). But those same concerned officials should also stress to their legislators opposition to preemption of city payday authority, at least until the state has done an adequate job of substantively regulating this growing industry (the worst of these bills would preempt cities but enact no new substantive regulations). The push to preempt cities will be very strong this session, and concerned city officials should speak out soon and often.