Payday Loans

KEY FACTS SHB 1709 preserves the ability of citizens to get a small loan – and at the same time the measure emphasizes important consumer protections. This legislation allows a borrower who is facing potential trouble to convert the loan into an installment plan allowing him or her to repay the debt and avoid falling into a dangerous cycle. The goal is to stop the practice of borrowers going to additional lenders in an ill-fated attempt to escape debt to the first lender. HB 1310 addresses the fact that most consumer complaints deal with the collection practices of payday lenders. This legislation will prohibit lenders from engaging in mean-spirited collection practices. Payday lenders will be prevented from harassing and threatening borrowers, for example, and from pretending to be law-enforcement officers.

A “payday loan” is a short-term, unsecured loan from a business that provides check-cashing, and that sells money orders, drafts, checks, and other commercial paper. The payday-lending industry here in Washington is regulated by the state Department of Financial Institutions.

This is how it works: The borrower writes the lender a post-dated check, and the lender in return provides a lesser amount of cash to the borrower after subtracting interest and fees. The lender then holds the check for a specified period of time, during which the consumer can either (1) redeem the check by paying the face amount of the check to the lender, or (2) allow the lender to cash the check after the specified period of time has gone by.

Right now, no lender can loan more than $700 to a single borrower at any one time. The lender can charge up to 15 percent interest on the first $500. If the borrower has a loan of more than $500, the lender can charge up to 10 percent on the amount over $500. Although there is no minimum loan term for a payday loan, current state law limits the maximum loan term to no more than 45 days.

2009 Legislation

Two measures have unanimously passed the House Financial Institutions & Insurance Committee. The first bill, SHB 1709, is designed to preserve payday loans as an option for people who have no other choice. The measure will help consumers stay out of payday-loan trouble in the first place – and get out of trouble if they do fall into it.

A key component in the measure limits loans to no more than whichever is the lesser of these two figures: more than 30 percent of a borrower’s income, or $700. Another crucial direction states that the maximum amount of any small loan – or the outstanding principal balances of all small loans made by all lenders to a single borrower at any one time – may not exceed $700. For example: At any one time, a customer can have one $400 loan and one $300 loan. The object of the measure is to stop the continuation of revolving debt that can make it extremely difficult for borrowers to repay a loan or loans.

An electronic enforcement system is created in the legislation to ensure that borrowers and lenders obey these new restrictions. A lender would also have to tell a borrower about an installment plan for repaying a loan if the borrower is in danger of failing to repay it and would have to provide the installment plan when a borrower notifies the lender that he or she will be or is unable to repay the loan. This installment plan would give the borrower 90 days to repay a loan of $400 or less, and 180 days to repay a loan of more than $400. HB 1709 also sets a cap of 8 loans per borrower in a 12-month period.

The other measure, HB 1310, aims to stop lenders from making mean-spirited communications in their collection practices. Complaints involving the industry have almost always involved collection practices on the part of some of the businesses. In fact, the payday-lending industry hasn’t actually been a big source of complaints in Washington. Out of about three million payday-loan transactions in 2007, the department heard 138 complaints from borrowers. A third to a half of these complaints dealt with collection practices.

This bill regulates collection practices the same way collection agencies themselves are currently regulated by our state’s Consumer Protection Act. Lenders would be prevented from:

• Threatening legal action against a borrower that isn’t already allowed by existing state law.
• Visiting a borrower's home or workplace without an invitation.
• Impersonating a law-enforcement officer.
• Making a statement that a borrower can interpret as indicating an official connection with a governmental law-enforcement agency.
• Harassing a borrower with abusive, frightening, or embarrassing communications, including communications that take place either at unreasonable hours or with unreasonable frequency.

For more information on SHB 1709 and HB 1310, please click here.