payday lending and its alternatives
TRANSCRIPT
Payday Lending and its Alternatives
American Bar AssociationBusiness Law Section
Consumer Financial Services Committee2013 Annual Meeting
Beer & Basics
Justin B. Hosie423.490.7564
What is a payday loan?
• Cash today for agreement to process a payment instrument on borrower’s payday• Two federal definitions summarized below, to consider:
– Commentary to Reg Z: • cash advance to a consumer • in exchange for personal check or debit authorization• agree the check won’t be processed, or deposit account won’t be debited, until a
future date. – Department of Defense Regulations:
• closed-end credit: term of 91 days or fewer, amount financed up to $ 2,000 • borrower receives funds and incurs interest or fee• contemporaneously with the receipt of funds:
– provides payment instrument – creditor agrees not to refrain from using instrument for at least one day
Is it check cashing?
Deferred Deposit Check Cashing, i.e. Payday Advance
1. Customer wants $1002. Customer may not have $100 in bank account,
until payday3. Customer gives a $115 personal check in
exchange for $1004. Charges 10% of the face amount of a larger
check, for cashing the check = $11.505. Charges $3.50 more to wait until payday to cash
the checka. Customer writes $115 personal checkb. Includes $3.50 in interest time delay in
cashing the checkc. Charges 15% total = $15.00d. Customer obtains $100
Check Cashing1. Customer wants $1002. Customer has $100 in bank account today, not
close to a bank3. Customer gives a $111.11 personal check in
exchange for $1004. Charges 10% of the face amount for cashing the
check = $11.115. No other charge, because cashes check same
daya. Customer writes $111.11 personal checkb. Check casher promptly deposits check –no
interest chargedc. Charges $10% check cashing fee = $11.11d. Customer obtains $100.00
• Some payday lenders started as check cashers offering the service as an “add on” check cashing service• Agreeing to delay depositing a check until the customer had more money• Payday advance laws often called: “deferred deposit” or “delayed deposit”
Do federal laws apply?
Yes. Most of the consumer credit laws you routinely see:
• Title X of Dodd-Frank• Truth-in-Lending Act – Regulation Z• Equal Credit Opportunity Act –
Regulation B• Fair Credit Reporting Act –
Regulation V• Gramm-Leach-Bliley Act – Privacy
and Safeguards Rules• Electronic Fund Transfer Act –
Regulation E • Check Clearing Act for the 21st
Century
• Bank Secrecy Act – USA Patriot Act • Federal Arbitration Act• Fair Debt Collection Practices Act
(via state law incorporation, trade association)
• Bankruptcy Act • Warner National Defense Act and
Department of Defense Regulations (currently only applies to payday, title, and refund anticipation loans)
• Servicemembers Civil Relief Act• Other general laws: TCPA, CAN-
SPAM, E-Sign, etc. may apply depending on practices
Are there unique issues under federal laws?
A few notorious examples:• TILA: Check / ACH as “Security” or “Security
Interest”• EFTA: Do repeat transactions mean that ACH
debit authorization is a PEFT? • FCRA: Are check verification companies
consumer reporting agencies?
Do state laws apply?
• 36 States• Typically laws impose:
– Rescission period– Minimum and maximum loan amounts– Maximum charges– Maximum number of outstanding transactions
• At one time• In a row with the same lender (typically 4-5 maximum)
– Signs and contractual disclosures– Payment plans– Compliance with key restrictions applicable to debt collectors under the FDCPA– State instituted database tracking customer transactions– Prohibitions on pursuing bad check prosecutions– Licensing, examination, and reporting– Administrative, civil, and criminal penalties for violations
Are these loans regulated?
• Federal– FTC always had authority to take actions– CFPB recently examined numerous payday
lenders• State regulators
– Usually the Department of Financial Institutions or similar agency
– Licensing, auditing, and law enforcement
Are these alternatives?
• Go without– risk non-payment on current expenses– damage to credit report for not paying other creditors– utility shut-off or utility reconnection fees– late fees– going without medicine or groceries– inability to get car from repair shop, etc.
• Ask for help– Pride– Don’t have someone close who can help
• Loan shark – Uses physical violence to extract repayment– Violates state and federal law
What are the alternatives?
May have similar costs to payday• Vehicle title loan• Installment loan• Credit union alternative loan (where new member fee
is required)• Overdraft line of credit• Noncompulsory overdraft• Rent to own items needed• Pawn something
May have higher denial rates than payday • Peer to Peer loan• Bouncing checks• Credit union alternative loan• New Internet alternatives: Lend-up, Emerge Financial
Wellnes, Float Money• Retail installment sale of goods/services needed• Installment loan
Time or financial constraint issues • 401K loan• Credit card / other open end line of credit• Second mortgage• Tax refund anticipation loan• Sell something• Loan from friend or family• File bankruptcy
Questions & Answers
Questions?
