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Committee passes ‘a balance for payday lenders and borrowers’

Kirby says bills are ‘an evenhanded compromise for the small-loan industry’

February 17, 2009

OLYMPIA – An important pair of measures emphasizing “a balance for payday lenders and borrowers” won unanimous approved in state Rep. Steve Kirby’s House Financial Institutions & Insurance Committee this morning (Tuesday, Feb. 17).

Kirby, who chairs the House committee, introduced a substitute bill to the main bill passed today, House Bill 1709.
“This substitute bill we passed is designed to preserve payday loans as an option for folks who have no other choice,” he said. “It will go a long way toward helping consumers stay out of trouble using the product, and making it easier for them to get out of trouble if they inadvertently find themselves trapped in a cycle of revolving debt.”

“There are a lot of people who can’t just reach into their pocket and pull out a credit card, or walk into their neighborhood bank or credit union and borrow the money to take care of a short-term need such as an auto repair or a broken appliance or what have you,” he explained.

“A payday loan for many folks is the only real choice – and it works for the vast majority of them. If used properly, a payday loan will cost the borrower only 15 percent of the amount borrowed – as long as the borrower isn’t using a later loan to try to pay off a previous loan. Problems happen when a borrower’s need lasts longer than his or her short-term loan allows. If the borrower takes out a loan simply to pay off another loan, he or she can actually end up paying as much in fees as the original loan.”

Earlier this year Kirby’s committee heard testimony on nine payday-loan measures. “The main legislation we passed today uses the best pieces from those bills to craft what I believe is one of the best payday laws in the nation.”

A key component of the measure directs that only one payday loan could be taken out at a time, and the loan cannot exceed whichever is the lesser of these two figures: more than 30 percent of a borrower’s income, or $700.

“This should significantly interfere with the spiral of revolving debt that can happen to borrowers under current law,” Kirby said.
The legislation also authorizes the implementation of an electronic enforcement system to ensure that borrowers and lenders obey these new restrictions.

Kirby said that payday lenders would have to tell a borrower about an installment plan for repaying loans if the borrower finds himself or herself in danger of failing to repay the loan. The plan would give borrowers 90 days to repay loans of $400 or less, and 180 days to repay loans of more than $400.

Also winning unanimous approval in Kirby’s committee this morning was House Bill 1310, which he is prime-sponsoring and which aims to stop lenders from making mean-spirited communications in their collection-practices against borrowers.

The Tacoma Democrat noted that the payday-lending industry “hasn’t been a big source of complaints in our state.” Out of about three million payday-loan transactions, the state Department of Financial Services heard 138 complaints from borrowers in 2007 – “and a third to a half of those complaints dealt with collection-practices on the part of payday lenders.”

“This second bill protects consumers by regulating payday lenders’ collection practices – the same way collection agencies are regulated under 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 any 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.

If the two measures eventually become the law of the state, “we will very likely see a dramatic and almost immediate drop in the number of consumers trapped in a cycle of revolving debt.

“This legislative package should eliminate the practice of borrowers going to multiple lenders in a doomed attempt to get themselves out of debt to another lender,” he said.

“Operators who make it their mission to create a spiral of revolving debt from which a consumer can never escape will be severely impacted right away. But payday lenders in the business of legitimately meeting the needs of someone with a short-term cash-flow problem will survive, and indeed make a respectable living in an industry that is heavily regulated but that will then no longer be burdened with the bad reputation of existing for the sole purpose of hurting people.

“Since the beginning of session this year,” Kirby said, “I have made a side career out of hammering out an agreement with consumer advocates and the industry that provides significant protections for consumers, and regulatory certainty for the lenders. These bills are the result of that effort – and I’m looking forward to passing them on the House floor and through the Senate, and then getting the governor’s signature.”

Regulated by the state Department of Financial Institutions, payday loans are defined as unsecured, short-term transactions offered to consumers by a check-cashing business.

Here’s how the loans generally work: The borrower writes the lender a post-dated check, and then the lender provides a lesser amount of cash to the consumer – minus interest and fees. Following this initial transaction, the lender holds the check for a specified time period, during which the consumer can either redeem the check by paying the face amount to the lender or allowing the lender to cash the check after the loan period has expired.

Here are Web sites with more information on HB 1709 and HB 1310.