SB 5199

Washington State House of Representatives Office of Program Research	BILL ANALYSIS

Insurance, Financial Services & Consumer Protection Committee

SB 5199

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.

Brief Description: Restricting small loan practices.

Sponsors: Senators Berkey, Prentice, Benton, Hobbs, Hatfield, Schoesler, Parlette, Franklin and Keiser; by request of Department of Financial Institutions.

Brief Summary of Bill

Requires a small loan endorsement for any person making small loans to any person physically located in Washington, including loans made through the use of the internet, facsimile, telephone, kiosk, or other means.

Prohibits specific unfair, fraudulent, or misleading practices and makes any transaction that violates a prohibited practice uncollectible and unenforceable.

Hearing Date: 3/15/07

Staff: Jon Hedegard (786-7127).

Background:

Payday lending practices are regulated by the Department of Financial Institutions (DFI) under the Check Cashers and Sellers Act (Act), Chapter 31.45 RCW. The phrase "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. 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.

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 Act regulates payday lending practices and provides for regulation of licensees who are specifically authorized to issue small loans. No lender may lend more than $700 to a single borrower at any one time. The lender may charge up to 15 percent for the first $500. If the borrower has a loan in excess of $500, the lender can 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.

Under the Act, licensees must maintain business books, accounts, and records. The books and accounts must be maintained for at least two years after a transaction. The DFI also has statutory authority to examine books, accounts, records, and files, or other information of licensees and persons that the agency has reason to believe is engaging in the business governed by Chapter 31.45 RCW.

Borrowers and lenders may agree to a payment plan for payday loans. 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:

a written agreement is required;
the lender may charge the borrower a one-time fee in an amount up to the fee or interest on the outstanding principal;
the agreement must allow the buyer not less than 60 days to pay off the loan; and
the borrower must be allowed to pay off the loan in at least three payments.

The Director of the Department of Financial Institutions (Director) may impose the sanctions against any:

licensee;
applicant; or
director, officer, sole proprietor, partner, controlling person, or employee of a licensee.

Sanctions may include:

the denial, revocation, suspension, or conditioning of a license;
an order to cease and desist from specific practices;
the imposition of a fine not to exceed $100 per day for each day's violation;
the provision of restitution to borrowers or other injured parties; and
the removal from office or banning from participation in the affairs of any licensee.

Summary of Bill:

Any licensee making small loans to any person physically located in Washington must have a small loan endorsement. This includes loans made through the use of the internet, facsimile, telephone, kiosk, or other means.

It is a violation of Chapter 31.45 RCW to:

directly or indirectly defraud or mislead any borrower, lender, or person;
directly or indirectly engage in any unfair or deceptive practices;
directly or indirectly obtain property by fraud or misrepresentation; or
make 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.

In addition to any other penalties for a violation, any transaction is uncollectible and unenforceable.

Appropriation: None.

Fiscal Note: Not requested.

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