Sponsors: Senate Committee on Financial Services, Insurance & Housing (originally sponsored by Senators Winsley, Benton, Prentice, Keiser and Reardon; by request of Governor Locke).

Brief Summary of Substitute Bill

• Creates a comprehensive statutory scheme for the regulation of payday loans that includes consumer protection provisions, interest limits, and rescission rights.

• Enhances the regulatory authority of the Department of Financial Institutions via expanded licensing requirements and enforcement provisions.

• Requires payday lenders to make specified disclosures to borrowers which must be in compliance with federal law, including the Truth-in-Lending Act.

Majority Report: Do pass. Signed by 11 members: Representatives Schual-Berke, Chair; Simpson, Vice Chair; Benson, Ranking Minority Member; Newhouse, Assistant Ranking Minority Member; Cairnes, Carrell, Cooper, Hatfield, Hunter, Roach and Santos.

Payday loans: The business of check cashing and selling is regulated by the Department of Financial Institutions (DFI) pursuant to the Check Cashers and Sellers Act (Act). One of the common practices of such businesses is the issuance of what have become known as "payday loans." The term "payday loan" refers to a type of short term, high interest, unsecured loan that is typically offered to consumers by a business outlet offering check cashing services. The recipients of such loans are often low-income persons without access to other types of credit. In a typical payday loan transaction, the consumer 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. Such loans have come to be called "payday loans" since consumers have tended to obtain them as a form of cash advance on a forthcoming paycheck.

Some consumer advocates are critical of payday loans, insofar as they involve an extraordinarily high annual percentage rate (APR) and tend to be obtained by low-income persons who are poorly situated to pay such interest. Though the loans are very short term (i.e., 31 days or less) and are subject to no more than 15 percent simple interest, the typical interest rate is generally in the triple digits when such interest is calculated as an APR. Furthermore, some individuals who frequently use payday loans find themselves in a cycle of debt that is hard to escape.

Check Cashers and Sellers Act: Payday lending practices are subject to limited regulation under the Check Cashers and Sellers Act, Chapter 31.45 RCW (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. Though the Act does not attempt to comprehensively regulate payday lending practices, it does provide for some regulation of licensees who are specially authorized to issue small loans. Such loans are subject to three key limitations:

• The interest rate and fees, in the aggregate, may not exceed 15 percent of the principal loan amount; and

Regulatory scheme: The bill creates a comprehensive statutory scheme for the regulation of the payday loan industry that includes many consumer protection provisions. In addition, the regulatory authority of the DFI is greatly enhanced via expanded licensing requirements and enforcement provisions.

Term of loan: The maximum term of a payday loan is 45 days. This term can be extended pursuant to an agreement between the borrower and lender, provided no additional interest or fees are imposed.

Maximum balance: The maximum balance that may be owed by a borrower to a lender on one or more loans cannot, in the aggregate, exceed $700.

Interest rate: For one or more loans that amount, in the aggregate, to more than $500, interest is limited to a maximum of 10 percent for that portion of the loan exceeding $500. For amounts below $500, the interest rate remains at 15 percent.

Collateral: Collateral is limited to one post-dated check per loan. No other form of collateral is allowed.

Default: In the event of a default by a borrower, the following restrictions apply:

• The lender may only charge a one-time fee to the borrower, as determined by the DFI rule;

• The lender may take civil action, but can only recover the principle and collection costs; and

• The lender is prohibited from threatening the borrower with criminal prosecution as part of its collection effort.

Payment plan: After four successive loans and prior to default on the last loan, a borrower is entitled to convert his or her loans into a payment plan with the lender. Such payment plans are subject to the following conditions:

• The agreement must allow the buyer not less than 60 days to pay off the loans; and

• The borrower must be allowed to pay off the loan in at least three payments.

Rescission: A borrower has the right to rescind the loan within one business day of its inception. Rescission is effected by the borrower returning the principle to the lender.

Disclosures: The lender is required to make specified disclosures to prospective borrowers and must comply with federal laws, including the Truth-in-Lending Act. Advertisements must also comply with federal law and – where they include an advertised interest rate – the APR must be disclosed.

Effective Date: The bill takes effect 90 days after adjournment of session in which bill is passed, except for section 12, relating to payment plans, which takes effect October 1, 2003.

Testimony For: The bill makes necessary changes with respect to the regulation of payday lending practices and provides many protections for consumers. Members of the military often obtain payday loans and thus many lenders are located near military bases. The bill increases the maximum loan amount to $700. The bill was requested by the Governor and should be passed.

Testified: Senator Winsley, prime sponsor; Mark Thomson, Department of Financial Institutions; and Jerry Farley, Financial Service Centers of Washington.