HBA-JLV S.B. 471 77(R) BILL ANALYSIS Office of House Bill AnalysisS.B. 471 By: Carona Financial Institutions 5/5/2001 Engrossed BACKGROUND AND PURPOSE A deferred deposit loan or payday loan is a small consumer loan for a short period of time that is secured by the borrower's personal check (instrument) and is currently an unregulated lending practice. There are concerns that lenders of deferred deposit loans charge high interest rates that help create a cycle of debt from which low-income consumers may find it difficult to escape. Additionally, if a borrower is unable to repay the loan at the expiration of the loan period, the lender may extend the loan period (renewal) if the borrower agrees to pay an additional interest rate, which again may be at an elevated rate. However, if the borrower does not wish to extend the loan period, the lender can deposit the original personal check, knowing that the borrower possess insufficient funds to cover the check. When the check is returned due to insufficient funds, some lenders have been known to turn the check over to their local criminal justice system for criminal prosecution as a hot check. These practices have raised concerns regarding the lack of regulation on deferred deposit loans or payday loans. Senate Bill 471 provides regulatory requirements for businesses and lenders offering deferred deposit loans. RULEMAKING AUTHORITY It is the opinion of the Office of House Bill Analysis that this bill does not expressly delegate any additional rulemaking authority to a state officer, department, agency, or institution. ANALYSIS Senate Bill 471 amends the Finance Code to regulate deferred deposit loan (loan) transactions. The bill requires each loan transaction and renewal to be documented by a written agreement and requires a lender to provide a notice to potential borrowers containing the purpose of the loan (Secs. 342.602 and 342.603). The bill authorizes a lender to charge, for each loan, a finance charge not to exceed the finance charge authorized by existing law (Sec. 342.604). The bill requires a lender to post a notice informing potential borrowers of the lender's prohibition on advancing a loan amount that is greater than $500 and that the borrower has the right to rescind the loan no later than 5 p.m. on the next business day after the loan transaction date. The bill does not prohibit a lender from being a party, with the same borrower at the same time, to a deferred deposit loan and a loan authorized by these provisions other than a deferred deposit loan (Secs. 342.605 and 342.607). The bill prohibits a lender from engaging in a loan with a term of less than seven or more than 31 days (Sec. 342.606). The bill provides that a deferred deposit loan must require that, before renewal of the loan, the borrower must have paid all finance charges accrued to the time of the renewal plus an amount equal to at least 10 percent of the principal amount of the loan at the time the loan was made, in the case of the first renewal, or at the time of the preceding renewal, in the case of a subsequent renewal. The bill provides that the loan may be renewed without payment of 10 percent of the applicable principal amount if the finance charge on the renewal is computed only on the principal amount of the loan that would have remained unpaid if the borrower had paid 10 percent of the applicable principal amount. The bill prohibits a borrower from renewing a loan more than three consecutive times and if the borrower does not pay the debt, the lender may deposit, negotiate, or present for payment the borrower's instrument. The bill authorizes a lender to assess additional finance charges not to exceed $15 for every $100 advanced on a renewal of a loan. The bill also authorizes a lender to charge a pro rata finance charge for any incremental amount advanced in excess of a multiple of $100. Upon completion of a transaction, the bill authorizes the lender to enter into a new loan agreement with the borrower. The bill authorizes a lender to enter into a new deferred deposit loan transaction with the borrower the next business day after the borrower has completed the deferred deposit loan transaction (Sec. 342.608). The bill authorizes a lender to pay the proceeds from a loan to the borrower in the form of a business instrument, a money order, or cash. The bill prohibits a lender or the lender's third party provider from charging an additional finance charge or fee for cashing the lender's business instrument (Sec. 342.609). The bill provides that before the lender negotiates or presents the instrument the borrower has the right to redeem any instrument held by the lender as a result of a deferred deposit loan if the borrower pays the full amount of the instrument to the lender (Sec. 342.611). The bill requires a lender offering a loan to post a notice of the charges imposed for the loan and to maintain records and file an annual report with the consumer credit commissioner (commissioner) (Secs. 342.613 and 342.615). The bill grants authority to conduct a loan business only to authorized and licensed lenders and requires the lender to obtain and maintain a separate license for each location where loan business is conducted (Sec. 342.616). The bill sets forth requirements of a third-party lender if loans are offered at the place of business of a thirdparty provider (Sec. 342.617). The bill sets forth provisions authorizing the commissioner or the commissioner's representative, at the times the commissioner considers necessary, to examine and investigate a third party provider's place of business to determine the provider's compliance (Sec. 342.618). The bill provides that a borrower is not subject to a criminal penalty for entering into a deferred deposit loan agreement or in the event the instrument is dishonored, unless the borrower has made a false statement to obtain credit (Sec. 342.621). A deferred deposit loan made by a person other than a lender is a deceptive trade practice (Sec. 342.622). The bill requires a lender to consider when making a deferred deposit loan whether the borrower will be able to timely repay the loan (Sec. 342.623). EFFECTIVE DATE September 1, 2001.