Property Tax Loans Another Frontier for Predatory Lenders

Unscrupulous lenders in Texas are takingadvantage of homeowners struggling to pay their property taxes–a practice Texas lawmakers could halt by providing relief to homeowners once property taxes reach a certain percentage of income.

This form of predatory lending has nothing to do with more common payday advances, tax refund anticipation loans, or auto title loans. Instead, property tax lenders pay off homeowners’ delinquent taxes and allow them to repay the loan over a set period. These lenders take advantage of consumers much in the same way as other predatory companies by offering loans at usurious rates and entangling customers in a web of debt that most can ill afford.

The industry, not surprisingly, claims it provides a service to homeowners facing financial pressure from rising property taxes, but as Robert Doggett, an attorney for Texas Rio Grande Legal Aid, explained, these borrowers are “jump[ing] from a frying pan into a fire.” Property tax loans, which totaled $224 million in 2011, give the lender first priority at recouping its money at foreclosure.

“Low” Taxes Cost

Texas prides itself on being a low-tax state. But in truth its regressive tax structurerequires fairly high tax payments from poorer residents. The poorest 20 percent of Texans pay more of their income in taxes than the rest of the state’s population, and they pay more than low-income residents in all but five states. This is in part due to high sales and property taxes.

Just as payday loans are not the solution to persistent poverty and the plethora of low-wage jobs, property-tax loans are not a solution for homeowners struggling to pay property taxes.

Property-tax lenders are a business foremost concerned with profitability. They don’t have consumers’ best interest in mind. While a local government may be willing to put a resident on an installment plan to prevent foreclosure — and all the negativeeconomic and social costs that come with it — private property tax lenders are all too happy to scare consumers into predatory loans and push homes into foreclosure.

State authorities are trying to regulate the industry, and state lawmakers have recently passed legislation that would give homeowners better options for paying off delinquent property taxes. But one simple way to prevent the root cause of the problem has been overlooked: a property tax circuit breaker.

Policy Solution

Property tax circuit breakers provide a tax credit to homeowners (or, in some cases, renters) once property taxes reach a certain percentage of their income. Thirty-three states and the District of Columbia have some form of the credit in their tax code, but not Texas. In fact, Texas Gov. Rick Perry vetoed legislation in 2009 that would have required the state comptroller merely to study the feasibility of a circuit breaker. Circuit breakers protect low- and moderate-income taxpayers from unaffordable property tax increases, which helps avoid tax delinquency and the subsequent need for property tax loans. Texas would be wise to consider such a policy.