CSO Model Basics

The information in this post is taken from a power point by attorney Scott Sheehan of Greenberg Traurig.  J. Scott Sheehan is a business lawyer with a national practice in banking and financial institutions, and consumer and commercial financial services.

The CSO registers as a CSO under Chapter 393 of the Texas Finance Code. It advertises for customers for credit services, including the arranging of loans by an independent third-party lender and the issuance of a letter of credit or similar engagement that secures payment by the customer of the loan from the third-party lender.

The third-party lender, in turn, operates as a lender under Chapter 302 of the Texas Finance Code by limiting its compensation to an effective rate of interest not to exceed 10% per annum. In Texas, a lender is not required to be licensed if the interest rate is below 10% per annum.

Characteristics:

• The CSO and the third-party lender must be unaffiliated, with no common ownership, no common directors, officers or employees, and with no financial relationship;
• The CSO must maintain all necessary registrations, bonds, disclosure statements, contract terms and procedures required for a CSO under Chapter 393;
• All all loans by the lender must be approved based upon criteria established by the lender;
• The lender’s loan documents must conform to the limitations of Chapter 302;
• The lender’s funds must be the sole source of funds for all of the consumer loans;
• The lender may not share directly or indirectly in the CSO fees or other permitted charges;
• The CSO may not share directly or indirectly in the lender’s 10% per annum interest or other permitted charges;
• The CSO is not authorized to act as the lender’s general agent; and
• The CSO may act solely as special limited agent of the lender as to specific matters expressly approved in writing by the lender.

Legal Precedent: