HOUSE BILL REPORT

HB 1485

BYRepresentatives Jacobsen, Dellwo and Heavey

Modifying the interest rates that non-profit corporations may charge on postsecondary education loans.

House Committe on Financial Institutions & Insurance

Majority Report:  Do pass.  (15)

      Signed by Representatives Dellwo, Chair; Zellinsky, Vice Chair; Chandler, Ranking Republican Member; Anderson, Baugher, Beck, Crane, Day, Dorn, Inslee, P. King, Nutley, Schmidt, K. Wilson and Winsley.

House Staff:John Conniff (786-7119)

AS PASSED HOUSE MARCH 14, 1989

BACKGROUND:

The Washington State usury statute governs consumer loans and limits the amount of interest chargeable by a lender.  Under the statute, a lender may charge the greater of 12 percent or four percent above the average 26 week treasury bill rate as published by the Federal Reserve Bank of San Francisco.  The statute also permits a lender to charge an administrative fee on loans under $500.  No other provision authorizes the charging of fees on general loans.

Increasing restrictions on participation in the federal guaranteed student loan program have created a demand for private student loans.  While federally guaranteed student loans are exempt from the state usury statute, private student loans are not exempt.  Because of the long time period between loan origination and loan payback, student loans are backed by a guarantor to protect the lender against the risk of borrower default.  However, charging a fee to pay for guarantor protection may result in a violation of the state usury statute when the fee is calculated into the rate that the student must pay for the loan depending upon the usury statute rate in effect when the loan is made.

SUMMARY:

Non-profit corporations may make student loans at any interest rate that federal and state laws permit to be charged by state or federally chartered financial institutions.

Fiscal Note:      Not Requested.

House Committee ‑ Testified For:    Ned Lange, Student Loan Finance Association; Jerry Kukas, Vice President, Student Loan Finance Association; Carl Donovan, Student Loan Finance Association; and Al Perry, Pacific Lutheran University.

House Committee - Testified Against:      None Presented.

House Committee - Testimony For:    As the federal government imposes greater eligibility restrictions on student participation in the guaranteed student loan program, private sources of school loans must be created to meet student needs.  Exempting non-profit corporations from the state usury statute will permit these corporations to obtain private loan guarantee coverage and to build the cost of such coverage into the loan without fear that the floating usury rate will drop to a point that the loan becomes usurious.  Private student loan rates will be limited to the amount that financial institutions may charge.

House Committee - Testimony Against:      None Presented.