HOUSE BILL REPORT

HB 1239

BYRepresentatives P. King, Schmidt and Scott

Exempting qualified pension plans from the state usury statute.

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 10, 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 administrative fees on general loans.

Many employee retirement plans permit participating employees and beneficiaries to obtain loans.  The cost of administering such loans must be borne either by the borrower or the plan itself.  If the plan bears the costs, all participating employees and beneficiaries indirectly pay for loan administration.  Depending upon when the loan is made and the floating rate of interest in effect at such time, charging the borrower for the costs of loan administration may violate the state usury statute when the costs are calculated into the overall rate that must be paid by the borrower.

While the federal Employee Retirement Income Security Act (ERISA) governing employee retirement plans arguably preempts state usury statutes, a lack of certainty as to the application of the usury statute makes plan administrators reluctant to charge the borrower for loan administration.

SUMMARY:

The state usury statute does not apply to any loan permitted under applicable federal law and regulations from a tax-qualified retirement plan to a plan participant or beneficiary.

Fiscal Note:      Not Requested.

House Committee ‑ Testified For:    Rich Birmingham, Washington State Bar Association.

House Committee - Testified Against:      None Presented.

House Committee - Testimony For:    Exempting qualified pension plans from the state usury law will allow pension plans to continue or to institute loan programs for plan participants without the difficulty and uncertainty arising from the usury statute's floating rate and will resolve any conflict between federal and state law.

House Committee - Testimony Against:      None Presented.