AUSTIN - The largely unregulated industry of property-tax lending is about to get more oversight.
Texas' thrift regulator is asking firms that make loans to help homeowners pay property taxes to get licensed as mortgage brokers or risk being shut down. Though the Texas Department of Savings and Mortgage Lending has fielded few consumer complaints, its commissioner said the nature of high-interest rate lending to subprime borrowers presents opportunities for predatory lenders.
"They could take advantage of less financially literate and financially distressed people," said Danny Payne.
Property-tax lenders, for their part, say they welcome the oversight and are not putting up a fight. Indeed, several have banded together to form a trade group with a goal of increasing lenders' credibility.
Property-tax lending is believed to be unique to Texas. A change in the tax code in 1995 opened the door for the specialized lenders, and demand has picked up in recent years as property values have skyrocketed and increased homeowners' tax burden.
Still, because the industry has not been regulated, no one knows how many firms are making the loans. Estimates range from a dozen to more than 100.
The thrift regulator began looking into property-tax financing about two months ago, after a consumer complaint involving marketing. Nothing came of the complaint, but the department determined that the lending practice, which has loans secured by a first lien on the property, falls under the state's definition of mortgage lending and should be regulated as such.
Tax lenders will need to obtain licenses to continue doing business and should contact the Texas Department of Savings and Mortgage Lending. The department has issued a few 90-day provisional licenses to established lenders, Mr. Payne said.
"We don't want to have any consumers left hanging that might be helped by their activities, so we issued temporary licenses so they can keep operating," he said.
Among the qualifications a lender must have to get a license are a net worth of $25,000 and at least 18 months' experience in the mortgage field. Failure to obtain a license will result in a cease-and-desist order or an injunction from the attorney general's office, Mr. Payne said.
Property-tax lenders pay the tax debt of a property owner and assume the tax lien on the property, which is given precedence over mortgages and other liens. Tax loans can range between 12% and 18% interest for periods of three to 10 years, said Phil Migicovsky, an owner of Tax Ease, a tax lender based in Dallas.
Mr. Migicovsky is also one of three organizers of the Texas Property Tax Lenders Association, which formalized its association in May. Though he agrees the industry needs oversight and he plans to apply for his mortgage broker license within the next few days, he does not completely agree with the regulator's decision.
"We believe the law as it stands today does not require licensing, but we are more than willing to cooperate with regulatory agencies and become licensed," he said. "We don't believe we fit squarely into the parameter of mortgage brokers."
The new trade group is developing standards of conduct and responsibility for members across the state, Mr. Migicovsky said. He added that its organizers support government oversight and regulation of their industry. The group plans to do a membership drive later this summer.
Mr. Migicovsky said that while interest rates on the loans are high, they are still lower than what consumers could face if they fail to pay their property taxes on time.
The penalties and interest on late tax payments start at 7% in the first month of delinquency and are capped at 24% annually, according to Travis County Tax Assessor's Office. Mr. Migicovsky, who has been in business since 2003, has not foreclosed on any of the loans his company has made, he said.
"We think that is a good thing," he said. "We really try to work with our customers and keep them in homes and restructure their payment plans. We really don't want to foreclose. That's not to say we never will."
Mr. Payne said that the department has received no consumer complaints about tax lenders using predatory lending practices and that he is not aware of any evictions due to nonpayment of tax loans.
