esq
.; Jean Hooge; Nellie Robinson; and Eva Herbery).
The citizen comments expressed concern about the general practice and authorization
of "payday loans". Other than a general objection to the concept of "payday
loans" the comments offered no other specific suggestions or criticisms of
the rule. The commission understands the potential abuses that may accompany
payday loans and the commission is adopting the rule to minimize those abuses.
The rule does not authorize a payday loan transaction outside the context
of Subchapter F, Chapter 342 and is designed to pointedly address payday loans
within the parameters of Subchapter F. The commission agrees with the commenters'
general concern of potential abuses, but disagrees that the loan must be declared
illegal within the context of the current credit statutes. Comments were also
received offering specific suggestions on the rule from Conrad Werkenthin,
Clark, Thomas & Winters, Austin; Paul Purtha, Humphreys & Peterson,
Garland; Consumers Union and Consumer Federation of America; Carl Beasely,
Huntsville; and Gary Kley, Livingston. Four other comments expressing dissatisfaction
that the maximum allowable rate was not high enough to compete with out of
state banks offering payday loans or that the minimum charge could not be
earned frequently enough such that it limits this product's viability were
received from Christopher Yonavich, Royse City; Larry Nuckols, San Antonio;
Buz Waitz, San Antonio; and Martin D. Huggins, Austin. One of these comments
states "the risk associated with a payday loan under these proposed rules
is just greater than the reward of the rate you can charge." In response to
the general comment that the rate that may be charged on a payday loan is
not adequate, the commission declines to amend the proposed rule. The commission
is bound to follow the credit statutes as enacted by the Texas Legislature.
The commission is merely adopting rules to recognize a payday loan transaction
within the context of the existing statute. The commission does not have the
authority to increase the rate that may be charged on a payday loan.
Typically in a payday loan, a cash advance is made to a consumer in exchange
for the consumer's personal check, or the consumer's authorization to debit
the consumer's deposit account electronically. In either case the consumer
pays a fee in connection with the advance. Both parties understand that the
amount advanced is not, or may not be, available from the consumer's deposit
account at the time of the exchange. The parties agree, therefore, that the
consumer's check will not be cashed or deposited for collection until a designated
future date. On that date, the consumer may have the option of repaying the
obligation or further deferring repayment of the advance. The consumer may
repay the obligation in various ways, for example, by providing cash or allowing
the obligee to deposit the consumer's check or electronically debit the consumer's
deposit account. The obligation for repayment classifies these transactions
as loans within the statutory definition of loan (Texas Finance Code §301.002(10)).
The charge associated with the advance is interest or compensation for the
use, forbearance, or detention of money (Texas Finance Code §301.002(4)).
These types of transactions clearly fall within the purview of Title 4 of
the Finance Code. Furthermore, the maximum rate limitations for a loan of
this type would be subject to Chapter 342. This rule prescribes the standards
of conduct that will be used to regulate and enforce these transactions within
the framework of Chapter 342.
Section 1.605 establishes the ability for a lender licensed under Chapter
342 to take a check to secure the payment of a loan. The practice of payday
loans or deferred presentment transactions has rapidly spread across the United
States. This rule recognizes and authorizes this type of loan within the Texas
statutory usury framework.
Subsections (a) and (b) of the rule establish the definition and application
of a payday loan or deferred presentment transaction. These subsections are
necessary to appropriately define the types of transactions that may fall
within the rule's scope. One commenter suggested that the definition be expanded
to apply to a transaction where the exchange would be "in part or in whole"
for the check and the amount of the advance. The commenter believes that this
clarification will prevent the "exotic disguises" of what is otherwise a payday
loan. The definition in this section was drafted to correspond to a similar
definition in the Staff Commentary to Regulation Z (12 C.F.R. Part 226). While
the commission does not disagree with the comment, the commission believes
that it is more important to retain the definition as proposed so that it
is consistent with the definition in the Regulation Z commentary.
Subsection (c) clarifies the maximum charge that may be assessed on this
type of loan. One commenter suggested that it would clarify the rule to reference
all the provisions of Subchapter F when referring to the maximum amount that
may be charged on a payday loan. In particular the commenter believes that
it would clear up confusion related to subsection (f). The commission agrees
with this comment to reference these sections and amends the rule accordingly.
Subsection (d) establishes a minimum term of 7 days of a loan of this type.
One commenter objects to the minimum term of 7 days. This commenter urges
a payday loan term of at least 14 days or the borrower's next pay period.
The commenter believes that a seven day term for a payday loan is
per se
unconscionable. The commenter acknowledges that this version
of the proposed rules ameliorates the problem to some degree and supports
those changes. The commission disagrees with this comment. The commission
believes that the modifications made in this version of the rule place a borrower
in an equivalent position in regards to whether the borrower gets a 7 day
loan; a 14 day loan or a 21 day loan. The incremental charge incurred by the
borrower in these loans only relates to the daily finance charge and is proportionately
the same. Furthermore, the Texas Finance Code §342.258 authorizes the
commissioner to establish repayment schedules on a weekly basis. This subsection
conforms the rule with the statutory authorization.
Subsection (e) prescribes the procedures for these types of loans. The
subsection addresses the disclosures that must be given in addition to providing
the measures for rebating the unearned charges and the time limitation on
presenting a check for payment.
Disclosures are necessary to adequately inform the borrower of the requirements
and cost of this transaction. One commenter suggests requiring an additional
disclosure that reads as follows: "If you are having trouble managing your
debt, you may want to contact your local nonprofit consumer credit counseling
service. They may be able to work out payment plans and help get your debt
under control. You can reach them at (insert phone for nearest nonprofit consumer
credit counseling agency)." While the commission certainly supports the activities
of nonprofit consumer credit counseling agencies, the commission believes
that it would be inappropriate to require this disclosure at this time. The
Office of Consumer Credit Commissioner provides consumer education material
for display in each regulated lender's office. This material includes information
about nonprofit consumer credit counseling agencies. The commission declines
to adopt the additional disclosure.
The time restriction of 31 days for presenting checks to a bank for payment
is necessary to prevent checks from becoming stale, in addition, to ensure
that the borrower is adequately aware of the outstanding nature of the check.
A primary intended objective of regulating and enforcing these and other consumer
loan transactions is to ensure that a borrower fully understands the terms
and conditions of the obligation.
Subsection (f) provides interpretation of Texas Finance Code §342.501
and clarifies that multiple and duplicate loans are limited. Subchapter F
does not contemplate that a lender may have two loans to the same borrower
within the same month that each have initial terms of less than one month.
Potentially this situation could be construed as a violation of §342.501,
as this section prohibits more than one obligation under Subchapter F to the
same borrower that has the effect of exacting a greater interest charge than
would otherwise be authorized under other sections of the chapter. Subsection
(f) is intended to clarify how the agency will enforce the provisions relating
to obligations on more than one loan contract and how the agency will enforce
the maximum rate provision relative to multiple loans within the same month
to the same borrower or multiple rollovers. Texas Finance Code §341.002
specifies that a month is the period from a date in a month to the corresponding
date in the succeeding month. Two commenters specifically object to the application
of this subsection that recognizes a borrower may have multiple loans within
a month, but that earnings from acquisition charges are limited to a maximum
of $10 a month. The commenters believe that under section 342.253 they are
entitled to earn an acquisition charge each time a loan is renewed. The enactment
of Subchapter F contemplated loans made on a monthly basis. The rationale
for the assessment of an acquisition charge relates to the work required to
initially originate a loan. A routine renewal of a payday loan does not require
the same degree of work nor does it merit the same degree of charge. The commenters
argue that section 342.253 entitles them to multiple acquisition charges within
a single month. The commission believes that this interpretation could led
to an absurd result and thus, requires the adoption of this rule. Assuming
no term limitations, the commenters' argument would permit earnings of up
to 31 acquisition charges on a payday loan in a single month if the payday
loan were made for one day and renewed each day of the month. This would result
in finance charges of $314 on that $100 loan, an annual percentage cost of
approximately 3700%. Even using the minimum loan term set forth in these rules,
four consecutive seven day renewals would permit charges of $43.73 on a $100
loan in a single month resulting in an APR of approximately 570% for the entire
month. The commission believes that the statute does not support this interpretation
nor was it the intent of the Legislature in enacting Subchapter F to authorize
the earning of multiple acquisition charges within a single month. The commission
does not believe that it is appropriate to promulgate a rule that supports
this theory. By contrast, the rule permits the acquisition charge for the
initial term in the month with continuing charges for additional days. A $100
payday loan under the rule could have an acquisition charge of $10 and a daily
charge of 13.72 cents for each day the loan is outstanding. A comparable annual
percentage for the same 28 day period would be approximately 190%. The commission
declines to modify the rule as the commission believes that the rule appropriately
applies the statutory rates to the payday loan transaction. The rule is modified
with nonsubstantive clerical type changes. Additionally, subsection (f) maintains
a standard that the lender make a good faith effort to evaluate the borrower's
ability to repay consistent with the requirement established in 7 TAC §1.11.
The agency specifically solicited comments on the use of the word "civil"
in (f)(2). The agency received four comments on the use of the word "civil"
in the rule. Three commenters urge the removal of the word "civil" in the
rule. These commenters state that criminal prosecution is warranted especially
in certain situations, such as when a consumer deliberately stops payment
on a check or closes an account in an attempt to avoid payment on a payday
loan. One commenter argues strongly that the word "civil" should be retained
in the rule. The commenter points out that the essential element in prosecution
of hot check charges in Texas is the element of intent. The person writing
the check must intend to defraud the payee. In a payday loan transaction,
the element of intent is absent; the payee accepts the check knowing that
the funds were unavailable and the check instead represents a promise to discharge
a present obligation on a future date. The commission believes that the transaction
represents a promise to discharge a present obligation on a future date and
thus defines the character of a payday loan as a credit relationship. Whether
other criminal offenses may be present in a payday loan transaction is a fact
question that is best presented to a court of competent jurisdiction. The
commission makes a nonsubstantive change to the rule that retains the word
civil within the rule, but clarifies the rule regarding criminal prosecution.
Several of the provisions in the proposed rules are consistent with industry
practices and procedures in other states where the loan product is offered
in a regulated manner. These rules conform this type of transaction to the
Texas statutes and specifies the conditions that will be applied to these
transactions in order to enforce the usury statutes.
The new rule is adopted under Texas Finance Code, §11.304,
which authorizes the Finance Commission to adopt rules to enforce Title 4
of the Texas Finance Code. Additionally, Texas Finance Code §342.551
authorizes the Finance Commission to adopt rules for the enforcement of the
consumer loan chapter. The rule is adopted to harmonize this type of transaction
with the general objectives and purposes of the consumer loan statute, that
being providing protections to consumers from abuses and egregious practices
and providing the conditions and maximum limits for the amounts that may be
charged on a consumer loan. Furthermore, Texas Finance Code §14.108 grants
the consumer credit commissioner and the Finance Commission the authority
to interpret the provisions of Title 4, Subtitle B, in which Chapter 342 is
located.
§1.605.Payday Loans; Deferred Presentment Transactions.
(a)
Definitions. For the purposes of this chapter, the following
words and terms, when used in this chapter, shall have the following meanings,
unless the context clearly indicates otherwise.
(1)
Check--A check, draft, share draft, or other instrument
for the payment of money.
(2)
Payday loan or deferred presentment transaction--A
transaction in which a cash advance is made in exchange for the consumer's
personal check, or in exchange for the consumer's authorization to debit the
consumer's deposit account, in the amount of the advance plus a fee and where
the parties agree that the check will not be cashed or deposited, or that
the consumer's deposit account will not be debited, until a designated future
date. This type of transaction is often referred to as a "payday loan," "payday
advance," or "deferred deposit loan."
(b)
Authorization. A licensee may engage in a payday loan or
deferred presentment transaction under this chapter and subject to the provisions
of Texas Finance Code, Chapter 342, Subchapter F. A payday loan or deferred
presentment transaction is a loan of money. The check given in the transaction
may serve as security for the payment of the loan. A person who negotiates,
arranges, or acts as an agent for an authorized lender in a payday loan or
deferred presentment transaction that has an effective annual rate of greater
than 10% is required to be licensed.
(c)
Maximum charge. A licensee may charge an amount that does
not exceed the rates authorized in Texas Finance Code, §§342.251
- 342.258. The chart in Exhibit 1 provides examples of the maximum authorized
rates for loans made under Texas Finance Code Subchapter F. Texas Finance
Code §342.254 which prohibits other charges applies to this section.
Figure: 7 TAC §1.605(c)
(d)
Minimum term. A licensee may engage in a payday loan or
deferred presentment transaction with a term of not less than 7 days.
(e)
Procedures.
(1)
If a check is accepted, the licensee must require that
the check be made payable to the actual name of the company printed on the
license and must be dated the day the loan is made.
(2)
The transaction must be documented by a written agreement
signed by the borrower and the licensee. The agreement must contain the name
of the licensee, the transaction date, the amount of the check, a statement
of the total amount charged, expressed both as a dollar amount and as an annual
percentage rate (APR), and the earliest date on which the check may be deposited.
The agreement must also contain a notice of the name and address of the Office
of Consumer Credit Commissioner and the telephone number of the consumer helpline.
Additionally, the lender shall provide a notice to the consumer that reads
as follows: "This cash advance is not intended to meet long-term financial
needs. This loan should only be used to meet immediate short-term cash needs.
Renewing the loan rather than paying the debt in full when due will require
the payment of additional charges."
(3)
The borrower shall have a right to prepay the loan
and redeem the check at any time prior to the due date. If the loan is prepaid
in full, the lender must refund any unearned finance charges.
(4)
A check may not be held for more than 31 days and
then subsequently presented to the bank for payment.
(5)
The licensee must post a notice of the fee schedule
for engaging in a payday or deferred presentment loan.
(f)
Conditions. A lender may accept a check to secure payment
of a payday loan if the lender complies with the following sections.
(1)
Duplicate and multiple loans. The provisions of Texas Finance
Code, §342.501 and §1.851 of this title (relatin to Duplication
of Loans) apply to loans made under the authority of this section. In accordance
with Texas Finance Code §342.501 a lender and a borrower may renew a
loan, but the loan must be converted from a single payment balloon loan to
a declining balance installment note. Alternatively, the payday loan or deferred
presentment transaction may be renewed without limitation to the number of
renewals where the effect of the total amount of charge would not exceed the
total amount authorized by §342.252 having due regard for the amount
of the cash advance and the time the cash advance is outstanding. The result
is that the acquisition charge may only be earned once in a month and the
installment account handling charge may continue to be earned on a equivalent
daily charge basis in accordance with the limitations of Subchapter F. In
lieu of a renewal, a lender and a borrower may agree to extend the maturity
date of the existing payday loan or deferred presentment transaction.
(2)
Collection practices. A payday loan constitutes a
credit relationship for all purposes, including collection. If a borrower
defaults, including the return of the check to the licensee from a financial
institution due to insufficient funds, closed account, or stop payment order,
the licensee may pursue all legally available civil means to collect the debt.
Collection practices must be in accordance with this chapter and with the
Texas Debt Collection Practices Act, Texas Finance Code, §392.001 et seq
.
(3)
Fair lending. A lender must make a good faith effort
to assess the borrower's ability to repay the payday loan or deferred presentment
transaction under the loan terms.
This agency hereby certifies that the adoption has been
reviewed by legal counsel and found to be a valid exercise of the agency's
legal authority.
Filed with the Office of
the Secretary of State on June 19, 2000.
TRD-200004290
Leslie L. Pettijohn
Commissioner
Finance Commission of Texas
Effective date: July 9, 2000
Proposal publication date: May 12, 2000
For further information, please call: (512) 936-7640