Brief Description: Adding an additional payment plan option for small loans.

Sponsors: Representatives Kirby, Roach, Simpson, Strow, Santos, Rodne, Hurst, Kelley, Chase, Ericks, B. Sullivan, Hunt, Wallace, Haigh, Sells, Linville, Campbell, Green and Wood.

Hearing Date: 2/13/07

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, 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 at any time. 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:

Payment plans must allow the borrower to pay the total amount borrowed off in four or more payments.

In addition to the existing payment plan options, once every 12 months a borrower may convert the unpaid principal and fee with a lender into a payment plan. A licensee may not assess any additional charge to convert a loan into a payment plan. A licensee is only required to extend to each borrower one no additional cost payment plan during any twelve-month period of time. A new twelve-month period begins on the date that the payment plan is paid in full.

A borrower must return to the licensee's point of sale location and request a payment plan prior to the close of business on the business day before the due date of the loan. "Licensee's point of sale" is defined as:

• the licensee's store where the borrower obtained the loan;
• any other store operated by the licensee in Washington; or
• the method the borrower used to obtain the loan. This includes an internet web site, a telephone number, or any other remote means or method of communication.

An agreement for a payment plan must be in writing and acknowledged by the borrower and the licensee. Any agreement entered into after default on a small loan is not a payment plan.

The payment plan options must be conspicuously disclosed to a borrower. The disclosure must be:

• in twelve-point type;
• surrounded by a border with no other loan term in that border; and
• located on the same page as information required to be disclosed by the Federal Truth in Lending Act.

Appropriation: None.

Fiscal Note: Not requested.

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