HOUSE BILL REPORT

HB 1805

This analysis was prepared by non-partisan legislative staff for the use of legislative members in their deliberations. This analysis is not a part of the legislation nor does it constitute a statement of legislative intent.

As Reported by House Committee On:

Business & Financial Services

Title: An act relating to increasing the criminal penalty for making unlicensed small loans.

Brief Description: Increasing the criminal penalty for making unlicensed small loans.

Sponsors: Representatives Kelley, Fitzgibbon, Green, Stanford and Santos.

Brief History:

Committee Activity:

Business & Financial Services: 2/15/11 [DP].

Brief Summary of Bill

  • Makes unlicensed payday lending an unranked class B felony.

HOUSE COMMITTEE ON BUSINESS & FINANCIAL SERVICES

Majority Report: Do pass. Signed by 8 members: Representatives Kirby, Chair; Kelley, Vice Chair; Blake, Hudgins, Hurst, Pedersen, Ryu and Stanford.

Minority Report: Do not pass. Signed by 5 members: Representatives Bailey, Ranking Minority Member; Buys, Assistant Ranking Minority Member; Condotta, Parker and Rivers.

Staff: Jon Hedegard (786-7127).

Background:

Payday Loans.

Small loans (better known as "payday loans") are regulated by the Department of Financial Institutions (DFI) under the Check Cashers and Sellers Act (Act). The Act contains provisions for the licensing and regulation of businesses offering services related to check cashing and the selling of money orders, drafts, checks, and other commercial paper. The phrase "payday loan" refers to a type of short-term, unsecured loan that is typically offered to consumers by a business outlet offering check cashing services. In a typical payday loan transaction, the borrower writes the lender a post-dated check and, in return, the lender provides a lesser amount of cash to the consumer after subtracting interest and fees. Following this initial transaction, the lender holds the check for a specified period, during which the consumer has the option of either redeeming the check by paying the face amount to the lender or allowing the lender to cash the check after the loan period has expired.

Licensing.

A person or entity must be licensed to engage in the business of check cashing or check selling unless exempt from licensing requirements. A licensee must have a small loan endorsement to their check cashing or check selling license to make small loans in the state. An endorsement is required for each location where a licensee makes small loans. Applicants for a license or an endorsement must provide certain information and meet financial requirements.

Loan Terms.

A borrower may not take out more than $700 in small loans at any time from all lenders. A borrower may not borrow more than 30 percent of his or her gross monthly income. The lender may charge up to 15 percent for the first $500. If the borrower has a loan in excess of $500, the lender may charge up to 10 percent on the amount over $500. For example, a lender could charge up to $30 for a $200 loan or up to $85 for a $600 loan. The minimum term of a loan is the borrower's next paycheck unless that is less than seven days. If it is less than seven days, the minimum term is the date of the following pay date. There is a statutory maximum loan term of 45 days.

A licensee is prohibited from making a small loan to a borrower that is in default on a small loan. This prohibition lasts until the loan is paid in full or for two years after the small loan was made, whichever is earlier. A licensee is prohibited from making a small loan to a borrower that is in an installment plan. This prohibition lasts until the installment plan is paid in full or for two years after the origination of the installment plan, whichever is earlier. A licensee is prohibited from making a small loan to a borrower if making that small loan would result in a borrower receiving more than eight small loans from all licensees in any 12-month period.

Enforcement System.

A database system is authorized to enforce the Act. The system allows a licensee to verify if the potential borrower is eligible for a small loan. The system is available in real-time and is secure against unauthorized acquisition or use, tampering, or theft. The system is funded by a fee established by the Director of the DFI (Director) by rule. A lender may not charge an additional sum to recover the fee. Information in the system is exempt from public disclosure.

Prohibited Practices.

It is a violation of this chapter for any person to:

Any transaction in violation of a prohibited practice is uncollectible and unenforceable.

Criminal Violations.

Any person who violates or participates in the violation of the Act or a rule or orders of the Director is guilty of a misdemeanor.

Criminal Penalties.

A misdemeanor is punishable by:

A class B felony is punishable by:

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Summary of Bill:

It is a class B felony for any person to violate or participate in the violation of the prohibited practice of making a small loan to any person physically located in Washington through use of the Internet, facsimile, telephone, kiosk, or other means without first obtaining a small loan endorsement.

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Appropriation: None.

Fiscal Note: Preliminary fiscal note available.

Effective Date: The bill takes effect 90 days after adjournment of the session in which the bill is passed.

Staff Summary of Public Testimony:

(In support) This bill was part of House Bill 1644. House Bill 1644 was previously heard in the committee. The bill takes a current practice that is prohibited and increases the criminal penalty. Today, unlicensed lending is a misdemeanor. The bill makes unlicensed lending an unranked class B felony. This does not create a new crime. Loans from unlicensed lenders are illegal today.

(Opposed) None.

Persons Testifying: Representative Kelley, prime sponsor.

Persons Signed In To Testify But Not Testifying: None.