Before diving into what is meant by CSO loans and non-CAB loans, let's take a brief look at the meaning of Credit Services Organizations (CSOs) and Credit Access Businesses (CABs). Both CSOs and CABs are licensed companies that assist consumers in obtaining loans from unaffiliated third-party lenders. In that sense, CSOs and CABs do not lend money, nor do they design loan products, but they are the company that the borrower will interface with when it comes to certain loan types.
That said, you may recognize CSOs more from their older name as so-called credit repair companies that help borrowers reclaim their credit scores by extending credit to those that may not qualify for credit via traditional lenders. To help them do that, CSOs are regulated by the government to ensure that all requirements are met and that the borrower is able to meet the demands of their loan.
On the other hand, CABs and CAB loans represent somewhat of a new model of CSOs. They include payday loan companies, title loan companies and other lenders that are required to have a CAB license in order to offer CAB loans. Today, regulations stipulate that businesses that offer loans governed by CAB rules must adhere to certain protocols and restrictions, helping to save the borrower money over the lifetime of the loan.
The Rise of CSO Loans and the Fall of Non-CAB Loans
Starting primarily in the state of Texas -- yet also being used in Ohio and other states -- lenders that wanted to reach borrowers without hitting the FDIC limits sought a new kind of loan model. Instead of the bank model where the loan company was little more than a frontend for a larger bank in another state, lenders employed CSO loans and CAB loans, which led to the development of the Texas Credit Services Organization (CSO loans) or Texas Credit Access Business (CAB loans) loan model.
Here's how it works.
First off, the lender is responsible for determining the loan criteria or qualifications. They're also responsible for funding the loan and are prohibited from collecting more than 10% APR according to the FDIC rules. Any late or non-sufficient fund fees are authorized and laid out by the OCCC.
For the borrower, the loan becomes a CSO or CAB loan, and the borrower pays the CAB for the services and the lender for the loan. Borrowers can renew a loan by paying a CAB fee with lender interest.
But the crucial piece is the CSO or CAB that offers the actual loan service. There's a CAB loan fee of about $20 to $30 per $100 borrowed, and that helps finance the CAB's obligation to manage the loan, collect payments and deal with defaults. According to FDIC rules, the loan term can't be longer than 180 days (six months) and licensing is handled by the state OCCC. Unlike other types of loans, loans made under the CSO/CAB model may be collateralized with vehicles and other equipment.
Under the CSO loan model, payday loan lenders can continue to service the large consumer demand for payday loans without running afoul of state regulation, all the while improving margins and making it worthwhile to offer such products on the open market. After all, lenders have financial obligations and people to pay themselves, and the CSO model can help make payday loans a viable option with the end of the so-called bank model.
Furthermore, the CSO loan model has been upheld in court, both locally and federally, meaning that lenders won't have to revert to other loan models -- such as the bank loan model -- anytime soon. An added benefit to lenders is that the CSO loan model can help bring in higher transaction fees that wouldn't be possible under the bank loan model, which is also known as the regulated lender licensing model.
What Is a Credit Service Organization (CSO) Bond?
CSOs are able to meet the needs of lenders in hot payday markets because the CSO handles the fees, collects the money and guarantees the loan. Not only are the fees not capped, which means they can represent the true fees that are needed to adequately service the loan, but the CSO acts as sort of a go-between with the borrower and lender, allowing the lender to focus more on growing their business instead of servicing their loans. The bond itself is basically the guarantee that everything's on the up-and-up and that all rules and regulations have been followed. That helps protect both the lender and the borrower since the burden falls on the CSO to ensure the integrity of the loan, as well as to institute a remedy, if needed.
How Much Does It Cost To Get a CSO Bond?
Unsurprisingly, working with a CSO and getting a CSO bond comes with its own costs. Primarily, they're based on the qualifications of the applicant as well as the total loan amount. While bonds for less than $25,000 are based on the applicant's credit score, bonds for larger loans of more than $25,000 have a more in-depth process that may require additional documentation or information from the CSO or borrower. That means the cost of a CSO bond will be related to the borrower's qualifications, such as their income, work history and overall financial history. That said, most CSO bonds are approved for somewhere between 1% and 5% of the total loan amount.
Note that bonds and regulations are set at the state level, therefore costs can vary depending on the state that you operate in.
Credit Services Organization (CSO) vs. Credit Access Business (CAB)
If you're confused about the differences between CSO loans and CAB loans, you're not alone. In the state of Texas, for example, CSO loans are subject to the Texas Finance Code, which regulates payday and title loans. If a CSO is engaged in obtaining a loan on behalf of the customer, then the CSO is deemed to be acting like a credit access business (CAB) and would therefore be subject to enforcement under the OCCC. Other types of loans that aren't payday or title loans are known as non-CAB loans.
In November of 2019, the Texas attorney general issued an opinion that allows CSOs to obtain non-CAB loans for consumers. However, they're not allowed to avoid the requirements for CABs in doing so, though they are allowed to assist in obtaining a so-called "signature loan" where no collateral is given, such as a personal check, debit account access or an auto title.
Essentially, the CAB is there to help borrowers obtain credit without putting up collateral in advance, though all CABs have to register with the appropriate authorities, maintain accurate records of transactions and verify the income of borrowers. Additionally, CABs may also be required to supply information about financial education and training services to their customers depending on the rules and regulations in their state.
On the borrower side, regulations mean that CAB loans cannot exceed more than 20% of the gross monthly income of a customer, and a title loan cannot exceed more than 3% of the yearly income or 70% of the total retail value of the vehicle, whichever is less.
For lenders, these requirements can be strict and make it difficult to meet the needs of borrowers, which is why many lenders and borrowers seek out non-CAB loans that may not fall under the CAB requirements.
Demystifying Credit Services Organizations and Credit Access Businesses
Known more commonly as credit repair companies, credit services organizations or CSOs are basically any lender that requires a payment before credit is extended. They're regulated by the government and are not able to charge fees beyond the defined limits set forth by the states.
On the other hand, a credit access business or CAB is part of the new model of CSOs. Today, payday loan and title loan companies are required to obtain a CAB license that governs and dictates how the loan works, and it's all basically a replacement for the CSO model.
If you'd like to learn more about CSO loans and your non-CAB loan options as a lender, look to the experts at Infinity Software. We make loan management software for smaller payday and title loan lenders that makes running and managing your loan business a snap. And when you can spend less time and money managing your business, that can help you grow your business and put more money in your pocket at the end of the day. Call or contact us to schedule a demo today!