Brief Description: Regulating check cashers and sellers.

Sponsors: Representatives Cooper, Benson, Schual-Berke and McIntire; by request of Governor Locke.

Hearing Date: 1/31/03.

Staff: Thamas Osborn (786-7129).

Background:

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. 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 loan amount may not exceed $500;

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

•    the loan period may not exceed 31 days.

Summary of Bill:

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 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 department 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:

•    a written agreement is required;

•    the agreement must allow the buyer not less than sixty 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 (TILA). Advertisements must also comply with federal law and – where they include an advertised interest rate – the APR must be disclosed.

Appropriation: None.

Fiscal Note: Requested on January 30, 2003.

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