A High Price to Pay

It took Joel and Estela Acosta a week to move everything out of their home of 16 years.

Unable to afford a storage unit, the couple has moved many of their belongings to the yard of a house they’ve rented across the street. That yard is cluttered with cribs piled high with baby clothes, boxes of paper and a nightstand serving as a makeshift table. Their neighbors keep an eye on the furniture while the Acostas try to make the run-down rental habitable. 

The small wood-frame home they’d left, on El Pinto Road in Sullivan City, a border town 20 miles from McAllen, had been theirs since 1998—the year Joel Acosta and his sons built it from scratch.

The Acostas were evicted in May, following years of financial turmoil. Like hundreds of other Texans, they lost their home after defaulting on a property tax loan that had initially seemed like a financial lifeline. Joel and Estela were both working when they took out their $20,000 loan in 2007, but when Joel later lost his construction job, the couple struggled to pay the loan back and support their family on just one paycheck. The Spanish-speaking Acostas soon fell behind on their loan payments, and though they tried to catch up—in 2010 they managed a lump-sum payment of $9,000—they found it difficult to understand exactly how much they owed. They had a hard time decoding the complicated loan documents, written in English. They didn’t realize they’d walked into a trap. 

The lending company, Rio Tax, now owns the house and has secured it with a padlocked chain-link fence and a sign reading “private property” in large red letters. An old armchair the Acostas couldn’t take with them is still visible on the front porch. In their neighborhood alone, two other families have been threatened with foreclosure by Rio Tax. And across Texas, thousands of borrowers find themselves mired in debt from loans that were supposed to help them find a way out.

These high-interest loans are part of a multibillion-dollar industry native only to Texas and Nevada. The thriving business involves some of Texas’ most reputable entrepreneurs and large institutional investors. Propel Financial Services, the parent company of Rio Tax, controls about half of the Texas market. Backed by San Antonio billionaire Red McCombs, Propel claims in its financial disclosures to have never lost money on a loan. But there’s growing concern that homeowners take on unnecessary risk with property tax loans. And while demand is apparently high, their usefulness may be limited, especially after a recent change in the law that requires counties to offer payment plans to homeowners with delinquent taxes.

Over the past six months, we’ve traveled thousands of miles across Texas to talk to legal experts, county officials, former employees of lending companies and customers who’ve taken out loans. We also reviewed thousands of pages of legal and financial documents, using tax and property records from multiple public databases to piece together the first comprehensive overview of how the industry operates in Texas.

Property tax lending began to flourish in Texas in the late ’90s, taking advantage of a Depression-era provision in state law that allows a third party to pay off a homeowner’s property taxes with the homeowner’s consent. The law was never intended to create a business opportunity.

Many states allow local governments to sell delinquent property tax debt—tax liens—to private companies, which can then attempt to collect the debt plus interest and other fees. The Texas model is different: Homeowners can enter into contracts with lending companies, which pay off their tax debts. The homeowner then owes the lender, plus interest and fees. 

Property tax lenders aren’t required to assess the borrower’s ability to repay, because the property acts as collateral for the loan; failure to repay can result in foreclosure. And if that happens, the property tax lender is paid back first—even ahead of any pre-existing mortgage on the house. Thanks to this lien priority, the business is virtually risk-free. 

The number of borrowers who actually lose their homes to these loans is low. Propel says it has foreclosed on only 152 properties since 2007, a rate of around 0.5 percent. Many more customers, however, struggle to make their payments on time, leading to additional fees and further debt. In 2011, according to the only SEC filing available that shows such data, more than a third of Rio Tax’s loan portfolio was more than 30 days past due. 

Rio Tax put the Acostas’ home up for auction at a foreclosure sale in November 2011. The buyer? RioProp Holdings, Rio Tax’s sister company. The company bought the house for the opening-bid price of $21,084—the value of the debt on the property, and less than a third of its appraised value. 

The company can now resell the property on the open market for something closer to its full value. 

Encore Capital Group, which now owns Propel, refused to confirm any details about the Acostas’ loan or foreclosure proceedings. 

Estela still has Rio Tax’s business card. It reads: “Don’t Lose Your Home! Let Us Pay Your Property Taxes! Bad credit, no credit … no problem!”

Rio Tax is part of the biggest property tax lending operation in the state. In 2013, Propel’s portfolio of property tax loans was worth $213 million, according to company documents filed with the SEC.

Propel, founded by McCombs and CEO Jack Nelson in 2007, started with just a few employees in a small San Antonio office. Nelson spotted the business opportunity; McCombs put up the money.

On a day-to-day basis, the work was routine: calling potential customers, filing documents, managing payments. As the company expanded, Propel struggled to meet its own collection targets, according to one former employee who worked there for two years. “They wanted less than 2 percent of notes [to be] 120 days delinquent,” she said. “We did not make that goal. No way. More like 10 or 15 percent of the payments came in that late.”

In 2008, Propel bought a large share of Rio Tax’s loan portfolio and the two companies effectively merged, along with a third partner, Dallas-based Retax Funding. 

Like the Acostas, many of the customers who struggled to make their monthly payments on time, former employees say, had loans with Rio Tax, which lends in Hidalgo County and the border area, one of the poorest regions in the nation. According to SEC filings, more than 20 percent of Rio Tax’s loan portfolio was more than 90 days in arrears by the end of 2011. “The business is more predatory in places like McAllen,” another former employee said. “They knew people were in a tight spot, and they knew they could profit off of it.” 

By 2012, Propel was the largest property tax lender in Texas. In just three years the company’s revenues had increased almost 400 percent, from just over $4 million in 2008 to $19 million in 2010, according to the San Antonio Business Journal. Former employees recall extravagant summer parties and motivational talks from Red McCombs. In 2013, Propel was voted one of San Antonio’s top workplaces by the San Antonio Express-News.

Its profitability caught the eye of the debt-buying giant Encore Capital Group, one of the largest publicly traded companies of its kind in the U.S. In May 2012, Encore bought Propel for $186.8 million, and Propel moved into new offices in San Antonio. 

One of the things that made Propel such an appealing investment for Encore was its astonishing track record of never losing money on a loan. Despite lending to people who are already struggling to pay their taxes, the first priority attached to the tax liens in the company’s portfolio means that Propel effectively steps into the shoes of the county when the time comes to collect. 

And should the borrower be unable to repay the loan, the property tax lender is first in line to be paid back at foreclosure. “They will get paid back, period,” said Robert Doggett, an attorney for Texas RioGrande Legal Aid. “It’s basically a risk-free investment.” 

In fact, mortgagees will often pay off property tax loans themselves to protect their investment in the property. Over 60 percent of Texas property tax loan borrowers had a mortgage on their property at the time they took out a loan, according to a 2012 study by the Office of the Consumer Credit Commissioner (OCCC), the state government body charged with regulating the industry. The study also found that, in cases where the loans had been paid off in full, more than 40 percent were paid by a mortgage company—even though taking out a property tax loan is technically a violation of most standard mortgage agreements. 

“It’s a dandy investment,” said Steve Scurlock, executive vice president of the Independent Bankers Association of Texas. “You’re in an absolute, collateral-dependent, first priority lien position. How could you go wrong?”

Property tax lenders say their loans are good for homeowners, giving them more financial flexibility than local taxing entities can offer. If a homeowner remains delinquent with the county for months, heavy penalties are added to the original debt, and taking out a loan early enough can help to avoid such fines. In addition, they say, local governments receive tax revenue promptly and see higher collection rates when a tax lender takes over the debt. 

“Of course it makes my job easier,” said Hidalgo County Tax Assessor-Collector Paul Villarreal Jr. “It allows our taxpayers to find other means of getting the money to pay their taxes.”

Propel claims it saves homeowners from foreclosure: One in nine Propel customers, company spokesperson Lisa Margolin-Feher reported, has already been served with foreclosure-related documents or is about to be foreclosed on by the taxing authority when they take out a property tax loan. “Looking at this a different way,” she said, “we have saved 27 times the number of properties from foreclosure than we have foreclosed upon.” 

But some say this figure is misleading. 

“The appraisal districts send out letters all the time,” said Robert Doggett, the legal aid attorney. “That doesn’t mean they’re actually going to foreclose. The homeowner could very well have engaged in an installment plan or found another way to pay those taxes.” 

Lenders can add additional fees to the original debt: filing fees, fees for letting the homeowner know how much they owe, for title searches, copies of documents, bounced checks, collateral protection insurance and attorney’s fees in case of foreclosure. These can quickly add up to thousands of additional dollars of debt.

In 2012, the OCCC estimated that on an original loan of $8,000, a homeowner would end up paying between $13,000 and $17,500 over a five-year term.

Critics emphasize that the loans are made without any real consideration of the borrowers’ ability to repay—no such consideration is required by Texas law and, in Propel’s case, none is sought, according to two former employees and four customers. 

Borrowers may also not be aware of how their debt is growing. 

“You have to remember,” said Doggett, “taking out a property tax loan is one of the most complex financial transactions a consumer might ever engage in.” 

Rio Tax doesn’t send out monthly statements, making it difficult for borrowers to keep track of how much they have left to pay. Customers have to specifically request a payoff statement, which specifies how much it will cost to close the account.

Starting this year, counties have to offer homeowners who fall behind on their taxes the chance to pay off the debt in installments. “Communicating with the taxing entity can work wonders,” said Albert Guardiano, a counselor with the Consumer Credit Counseling Service of Greater San Antonio. “But, generally speaking, people are not aware that the option is available.”

Getting a loan from Propel, on the other hand, is straightforward. The company identifies and contacts potential customers by purchasing lists of homeowners who are behind on their property taxes from counties for as little as $200, according to Hidalgo County officials.

It is Propel policy to make loans with as high an interest rate as possible for the longest repayment term possible, according to former employees, and the company’s customer representatives have a powerful incentive to do so. “The salespeople knew the more the customers owed, the more they would make in commission,” said a former employee.

The terms of the loans vary from customer to customer. Propel’s average interest rate is around 14 percent, but rates can be as low as 9 percent or as high as 16 percent, according to former employees and contracts reviewed by the Observer.

The interest rate may also rise the longer a borrower has been in default with the county, meaning that the closer a customer comes to losing their home, and the more desperate they are, the higher the interest rate they’re charged, according to former employees.

Over an average repayment term of six years, with additional fees for loan processing and late payments, loans can quickly balloon into unmanageable debts. 

“People don’t realize how much it’s going to cost them,” said one former Propel employee. “If you don’t ask, they don’t tell you—they don’t explain the fine print.”

On a muggy morning in early June, a crowd of about 80 people gathers in a vacant lot covered with a beige metal roof near the Hidalgo County courthouse in McAllen. It’s the first Tuesday of the month and the county, tax and bank foreclosure sales are about to start. Eager buyers leaf through photocopied lists of properties for sale while the seasoned professionals set up chairs along the fringes of the lot.

All sorts of properties are up for sale: tracts of land, grand houses whose owners have fallen behind on their mortgage payments in the Great Recession, and modest homes whose residents have failed to make their tax payments to the county. A sheriff’s deputy conducting the auction reads the “notice to all bidders,” but she can hardly be heard over the excited chatter of potential buyers.

It was at a foreclosure sale like this one that Maria Solorzano, 49, lost her home in nearby Mission. Her experience shows just how confusing and painful the foreclosure process can be for a homeowner. 

She hates driving past the old house. The two pecan trees that her father planted in the front yard years ago are still there. Her eldest son, who died in a car accident soon after finishing his training for the Marine Corps, is buried in a cemetery nearby, but she uses a different route now, bypassing the house, when she visits his grave.

On Jan. 1, 2013, her home, which was valued by the county appraisal district at $65,279, was sold at a foreclosure sale for $7,100. The property was purchased by a company called Adelante Holdings, which is owned by the Wingates, an influential McAllen family. James Wingate, the younger of two sons, founded Rio Tax with Propel CEO Jack Nelson in 2007, and the Wingate law firm still handles Rio Tax’s legal work. 

While a county’s tax foreclosure sale is carried out by sheriff’s deputies, the sale of properties foreclosed on by property tax lenders is conducted by an attorney for the lender without county oversight. 

“If you have any complaints with them, you’d have to file a separate lawsuit, and most people wouldn’t have the money,” said Ricardo Gonzalez, an attorney who has represented homeowners fighting foreclosures by Rio Tax. “That’s why they take out the loan in the first place.”

It’s unusual for third parties to bid at the sale. Usually, the lending company buys the property for the value of the borrower’s debt. Propel says it has no financial incentive to foreclose. Any proceeds above the value of the outstanding debt must be paid first to prior lienholders, like a mortgagee, and then to the homeowner. But foreclosure can also mean that holding companies associated with the lender can acquire properties for a fraction of their appraised value. In all 30 cases we reviewed in Hidalgo County, Rio Tax-foreclosed properties were bought at auction by companies with close ties to the lender.

Not only does the borrower lose their property, they also lose their equity, which can become a lender’s tidy profit. “It’s easy money,” said Robert Doggett, the legal aid attorney, “if you don’t mind swindling people out of their homes.”

Like the Acostas, Solorzano took out a loan with Rio Tax when she fell behind on her property tax payments. It had been a bad year. She had lost her son in January and divorced her husband just a few months later. A flyer from the company had come in the mail. One day in early November 2008, she went to the company’s McAllen office to see if she might be eligible for a loan to cover three years of late taxes. Her application was approved, she says, within 10 minutes. Her loan was just under $5,800.

Solorzano had lived in the small blue house on East Goodwin Road in Palmview, on the outskirts of Mission, with her husband and three sons for almost 20 years. They had moved there in 1995, when there were just a few other houses on the road. Sitting outside in the evenings, they would hear coyotes howling in the orchards of nearby farms. 

She worked long hours from home as a transcriptionist for the local hospital. She would sometimes fall a few months behind on the loan payments, but she thought she always caught up. Toward the end of 2011, there was a rough patch when she kept falling behind, adding late fees to the account. By 2012, the year she was due to pay the loan off, she was sending the company extra payments in an effort to keep up. But she didn’t realize how much the fees had added up to over the years.

By the time Rio Tax foreclosed on Solorzano’s home, in November 2012, she had paid more than $3,000, about half the original loan amount. But because she had run up so much in late fees and other penalties, she still owed the company about $5,900 in total—more than the $5,800 she’d originally borrowed. Four years and thousands of dollars later, she was worse off than she’d been when she first took out the loan.

Solorzano said she had no idea in early 2012 that the company had started foreclosure proceedings. A foreclosure affidavit, dated February of that year, states that Rio Tax notified Solorzano by certified mail that she had 20 days to pay off the loan in order to avoid foreclosure. But Solorzano says her signature on the certified mail receipt doesn’t match any of the signatures on her loan documents, and that she never received the notice, and certainly never signed for it. 

The company sends at least six notices to homeowners before engaging legal counsel, wrote Lisa Margolin-Feher, spokesperson for Propel Financial Services, in an emailed statement. “It is nearly impossible for foreclosure to occur without a customer realizing their property is in the foreclosure process,” she wrote.

But Solorzano says she didn’t find out about the foreclosure until a month after it had happened. By then, Adelante Holdings had already bought and resold the house to Vincap Properties LP, a local real estate company. “But this is my house,” she remembers thinking. “What do you mean, you own it now?”

By June, Vincap Properties had been granted full possession of the property and the right to evict its occupants. Solorzano hired an attorney to contest the foreclosure and eviction, but a judge denied both appeals. A year later, she’s still fighting to regain any value from the house she had planned to leave to her two surviving sons. “Sometimes when I’m sweeping or mopping or cleaning,” she said, “it comes to my mind and I’m like, ‘Oh my God.’ It makes me very, very angry.”

“For 80 years, when Texans have needed help paying property taxes they’ve had a choice: property tax loans,” says an avuncular voice, as piano music surges in the background. “A choice that gives property owners affordable repayment options. A choice that reduces foreclosures. But special interests want to take away this choice. Lawmakers, please preserve the current lien priority for property tax loans.”

This radio ad would likely have made little sense to most listeners when it aired in early 2013. But inside the Texas Capitol, a fierce struggle was taking place between property tax lenders and their opponents in the banking industry. Bankers’ resentment of the lenders was longstanding: When their customers take out property tax loans, it impairs the collateral value of the property and can affect the borrower’s ability to make mortgage payments on time. 

For a while it seemed that the bankers had the upper hand. A coalition of consumer advocates, mortgage bankers and tax collectors had teamed up to propose legislation that would remove the property tax lenders’ trump card: their lien priority.

It was an attempt to subject property tax lenders to the same underwriting process as a bank making a mortgage loan, explained Steven Scurlock of the Independent Bankers Association of Texas. The property tax lender, under the proposed reform, would have to assess the borrower’s ability to repay, rather than simply securing the loan against the assessed value of the home.  

It was not the first time the Texas Legislature had tried to rein in property tax lenders, but removing the lien priority was a radical attempt to curb the lenders’ power. The legislation, the industry claimed, would destroy their business. 

Propel, led by CEO Jack Nelson, was at the forefront of the resistance. Virtually overnight, the lending industry formed an advocacy group, Protect My Texas Property, which launched an advertising campaign comprising radio spots and lurid advertisements in local newspapers. Groups of satisfied consumers wearing pro-tax loan T-shirts were brought to the Capitol to tell legislators about their positive experiences. Executives from banks that financed the industry submitted written testimony saying they would not continue to do so if the lien priority were removed.

The final version of the 2013 bill was a compromise. The lenders submitted to more stringent advertising restrictions and an end to the practice of “rolling over” loans and allowing lenders to incorporate additional client tax debts to the loan. The bill also banned the widespread practice of reselling bundled tax liens to third parties, often money management funds.

Another bill aimed at increasing consumer choice also passed in 2013. The new legislation aimed to remove demand for property tax loans by requiring county tax assessor-collectors to offer installment plans for the payment of property tax debts. Such payment plans had previously been offered at the discretion of individual counties, resulting in a patchwork of availability across the state. Some counties, like Dallas and Brooks, didn’t offer payment plans at all.

Property tax loans had “become like ‘pay-day’ loans but for a house,” wrote state Sen. Juan “Chuy” Hinojosa (D-McAllen). Property owners needed a more reasonable option to resolve tax delinquency, he argued. Otherwise, the state was as good as pushing people into the arms of the property tax lenders. 

The bill requires counties to offer installment plans for a minimum of 12 months and a maximum of 36, with payments to be made in equal monthly installments, without added penalties or interest. 

It’s too soon to say what the effect of the new law will be. “Folks who are eligible for county payment plans have never really been our customers anyway,” said Allen Beinke, a lobbyist for the Texas Property Tax Lienholders Association, an industry group. “Most of our customers want terms that go beyond 36 months.”

During the next legislative session, in 2015, many of the same issues are likely to be raised again. In particular, there remains debate over whether property tax lenders are bound by federal “truth in lending” statutes, which would require stricter underwriting standards. “We have to decide,” Rep. René Oliveira (D-Brownsville) told his colleagues at a recent committee hearing. “Is a Depression-era alternative that was little used for 70 years appropriate for today’s economy?”

Similar debates are taking place in statehouses across the country. Since its 2012 acquisition by Encore, Propel has tried to expand into other states, lobbying to change state laws in order to establish the lien priority that is so central to the company’s success in Texas.

When Dana Wiggins, advocacy director at the Virginia Poverty Law Center, got a call in late 2013 asking her organization to endorse a bill introducing property tax lending to the state, she was confused. She had never heard of a property tax loan before. Propel’s lobbying materials explained the business model as “the most property-owner-friendly option to help local governments collect the revenue they need.”

But why, Wiggins wondered, was there need for this product in Virginia? Meetings with Propel’s lobbyists left her even more confused. “A lot of the facts sounded good,” she said—preventing foreclosures, relief for struggling property owners—“but they didn’t have answers to a lot of our questions.” In Virginia, the bill died in committee. The same thing happened in Arizona, Oregon and Missouri. Utah even passed a bill banning the introduction of property tax lending.

So far, only Nevada has passed legislation allowing Propel to do business there the way the company does in Texas. Though there will be no regulatory oversight of the burgeoning industry in Nevada, Propel was successful in introducing a $500,000 bond requirement of any property tax lender wanting to move into the state. “It’s ostensibly to keep scamsters out, but realistically, it’s a real barrier to competition,” said Al Kramer, treasurer of Carson City, Nevada.

Propel still plans to expand its property tax lending business into other states, and is “working to penetrate the 80 percent of the Texas market that doesn’t use [property tax loans],” according to a presentation given by Encore Capital Group Vice President Paul Grinberg to investors earlier this year. 

Since the eviction the Acosta family has been adrift. Estela, her daughter, and granddaughter are staying with a friend in nearby La Joya, and Joel is living with relatives in Sullivan City. 

“I didn’t want to leave, as I had nowhere to go and nowhere to put our stuff,” Estela says. Joel worries that the now-vacant home will turn into a stash house for immigrants coming across the border. 

The ramshackle pink house that the family has rented across the street from their old place is still unlivable. When they tried to move in, they discovered a bathroom wall about to cave in and baseboards rotted through and covered in mold. With help from neighbors and his youngest son, Joel has been cleaning up the house, which they hope to move into soon. But the Acostas can’t quite give up hope that their old home, padlocked and empty, might someday, somehow, be theirs again. 

They are trying to find out how much it would cost to buy the house back, but it is not a straightforward process. They’ve run up thousands of dollars in legal fees trying to negotiate through a lawyer. RioProp Holdings bought the property at foreclosure for $21,084, but could sell it for something closer to $60,000—the appraised value of the house. The Acostas are still waiting to hear from the company. The longer they wait, and the more their legal fees add up, the more distant their hope of reclaiming the home.

The Acostas didn’t realize how much power they were signing over to Rio Tax when they took out their loan. Neither did Maria Solorzano. Propel says that foreclosure is a last resort. When things go wrong, though, borrowers are left fighting a company that, under Texas law, has many of the same powers and rights that government does.

Estela still can’t quite believe what happened. When she talks about the loan, her eyes well up with tears. “At first I was worried about being mortified about losing my house,” she said. “Now all I want to know is how much I have to pay to get my house back.”  

Caelainn Barr, originally from Ireland, and Charlotte Keith, originally from the U.K., are both recent graduates of the Stabile Center for Investigative Journalism at Columbia University in New York City. This story was completed with support from the Stabile Center for Investigative Journalism.

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