7 TAC §1.605
The Finance Commission of Texas (the commission) proposes
new 7 TAC §1.605 concerning the authority to engage in deferred presentment
transactions. The Finance Commission initially proposed a rule relating to
payday loans or deferred presentment transactions and received about ten comment
letters from interested individuals. Many of the comments received suggested
changes that improved the rule, which the commission has incorporated into
the text of the rule. The initially proposed rule appeared in the March 3,
2000, issue of the
Texas Register
(25 TexReg
1828) and is being withdrawn elsewhere in this issue. The commission proposes
the rule as modified. New 7 TAC §1.605 authorizes regulated lenders to
engage in payday loans or deferred presentment transactions under the authority
of Subchapter F, Chapter 342. In essence, this rule permits the lender to
take and hold a check to secure payment for a consumer loan. The rule provides
the appropriate procedures for a lender making a loan of this type and the
positions that the agency will apply in enforcing this provision of the statute.
Additionally, the rule interprets and applies the statute to the delivery
of a modern day product that was not contemplated at the time that the statute
was created, yet can be accommodated within the statutory framework.
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, detention of money [Texas Finance Code, §301.002(4)].
These types of transactions clearly fall within the purview of Title 4 of
the Texas 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.
Subsection (c) clarifies the maximum charge that may be assessed on this
type of loan. The subsection applies the provision of Texas Finance Code, §342.253
to a loan of this type.
Subsection (d) establishes a minimum term of 7 days of a loan of this type.
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. 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) clarifies that multiple and duplicate loans are limited.
Section 342.252 or 342.253 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. 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.
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. Specifically, the agency solicits
comments on the use of word "civil" in (f)(2). The agency is considering omitting
the word "civil" in the rule and specifically invites comments on any positive
or negative impact of such a change. The agency intends for this notice of
proposal to contemplate adopting subsection (f)(2) with the word "civil" or,
in the alternative, omitting the word "civil".
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.
Leslie L. Pettijohn, Consumer Credit Commissioner has determined that for
the first five-year period the rule will be in effect, there will be no fiscal
implications for state or local government as a result of administering or
enforcing the rule.
Commissioner Pettijohn also has determined that for each year of the first
five-year period the rule will be in effect, the public benefit anticipated
as a result of the adoption of the new rule will be to more adequately inform
the public and the regulated entities of the procedures pertaining to engaging
in payday loans or deferred presentment transactions.
The additional cost to the licensee to comply with the rule will be minimal
in order to provide this new type of transaction. The licensee will be required
to give a uniform disclosure to each consumer and to post a notice. The cost
should not exceed the equivalent cost of duplicating a single copy multiplied
by the number of transactions that the lender consummates. A standard cost
for reproducing a single copy is five to ten cents. If a lender makes 250
loans in a month, then the range of costs should not exceed $12.50 to $25.00
per month. The additional cost would be incurred on the basis of the number
of transactions and not based upon the dollar volume of the loans. The rule
provides no additional requirement for licensing beyond that already required
by the Texas Finance Code, Chapter 342.
Comments on the proposed adoption of the new section may be submitted in
writing to Leslie L. Pettijohn, Consumer Credit Commissioner, 2601 North Lamar
Boulevard, Austin, Texas 78705- 4207.
The new section is proposed 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 rules are proposed 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.
The rule affects Subchapter F of Chapter 342, Texas Finance Code.
§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 means a check, draft, share draft, or other instrument
for the payment of money.
(2)
Payday loan or deferred presentment transaction means
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, §342.253. The
chart in Exhibit 1 provides examples of the maximum authorized rates for loans
made under Texas Finance Code, §342.253. Texas Finance Code, §342.254
which prohibits other charges applies to this section. The chart in Exhibit
1 provides examples of the maximum authorized rates for loans made under 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 7 TAC §1.851 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 either 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 generally will be that the acquisition charge may
only be earned once in a given month and the installment account handling
charge may continue to be earned on an equivalent daily charge basis. 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. 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 proposal has been
reviewed by legal counsel and found to be within the agency's legal authority
to adopt.
Filed with the Office of
the Secretary of State, on April 28, 2000.
TRD-200003025
Leslie L. Pettijohn
Consumer Credit Commissioner
Finance Commission of Texas
Earliest possible date of adoption: June 11, 2000
For further information, please call: (512) 936-7640