109 HR 5350 IH: Federal Payday Loan Consumer Protection Amendments of 2006 U.S. House of Representatives 2006-05-10 text/xml EN Pursuant to Title 17 Section 105 of the United States Code, this file is not subject to copyright protection and is in the public domain.

I 109th CONGRESS 2d Session H. R. 5350 IN THE HOUSE OF REPRESENTATIVES May 10, 2006 Mr. Udall of New Mexico introduced the following bill; which was referred to the Committee on Financial Services A BILL To amend the Federal Deposit Insurance Act and the Truth in Lending Act to prohibit federally insured institutions from engaging in high-cost payday loans, to expand protections for consumers in connection with the making of such loans by uninsured entities, and for other purposes.

1.

Short title

This Act may be cited as the Federal Payday Loan Consumer Protection Amendments of 2006.

2.

Findings and purpose

(a)

Findings

The Congress makes the following findings: (1)Payday lending is a rapidly expanding form of high-cost, short-term credit that uses a borrower’s personal check as collateral and targets individuals with limited access to affordable credit who are in desperate need of cash to meet immediate obligations. (2)Consumer group and regulatory studies indicate that the average annual percentage rate on payday loans nationally ranges from 390 percent to 780 percent for a 2-week loan and a typical customer has 8 to 12 loans per year at a single lender. (3)While State law has traditionally prohibited such high cost lending through usury limits, small loan interest caps and other restrictions, these laws have either been revised to exempt payday loan transactions, or payday lenders have affiliated with insured depository institutions to invoke the most favored lender principle under Federal law to circumvent interest rate regulation in State law. (4)Lending that fails to assess borrowers ability to repay, that requires consumers to write checks on insufficient funds, that encourages perpetual debt or default on other obligations, and that facilitates violations of State law, is an unacceptable banking practice for insured depository institutions that threatens the safety of the participating institution and the broader banking system. (b)

Purpose

It is the purpose of this Act to encourage fair lending practices by prohibiting insured depository institutions from engaging in any form of payday lending, by restricting the use of personal checks drawn on, or forms of withdrawals from, accounts at insured depository institutions for purposes of making payday loans.

3.

Federal Deposit Insurance Act amendment

Section 18 of the Federal Deposit Insurance Act (12 U.S.C. 1828) is amended by adding at the end the following new subsection: (x)

Prohibition on certain unsafe and unsound banking practices

(1)

In general

An insured depository institution may not— (A)make any payday loan, either directly or indirectly; or (B)make any loan to any other lender for purposes of financing a payday loan or refinancing or extending any payday loan. (2)

Payday loan defined

For purposes of this subsection, the term payday loan means any transaction in which a short-term cash advance is made to a consumer in exchange for— (A)a consumer’s personal check or share draft, in the amount of the advance plus a fee, where presentment or negotiation of such check or share draft is deferred by agreement of the parties until a designated future date; or (B)a consumer’s authorization to debit the consumer’s transaction account, in the amount of the advance plus a fee, where such account will be debited on or after a designated future date. .

4.

Prohibition on certain unsafe and unsound lending practices

(a)

In general

Section 128 of the Truth in Lending Act (15 U.S.C. 1638) is amended by adding at the end the following new subsection: (e)

Prohibition on payday loans based on checks drawn on, or authorized withdrawals from, insured depository institutions

(1)

In general

A creditor may not make a payday loan to any person if the creditor knows or has reasonable cause to believe that— (A)the personal check or share draft the creditor receives from the person, in exchange for the loan, is drawn on an insured depository institution or insured credit union; or (B)the account the creditor receives permission from the person to debit, in exchange for the loan, is a transaction account or share draft account at an insured depository institution or an insured credit union. (2)

Definitions

For purposes of this subsection, the following definitions shall apply: (A)

Insured credit union

The term insured credit union has the meaning given the term in section 101 of the Federal Credit Union Act. (B)

Insured depository institution

The term insured depository institution has the meaning given the term in section 3 of the Federal Deposit Insurance Act. (C)

Payday loan defined

The term payday loan means any transaction in which a short-term cash advance is made to a consumer in exchange for— (i)a consumer’s personal check or share draft, in the amount of the advance plus a fee, where presentment or negotiation of such check or share draft is deferred by agreement of the parties until a designated future date; or (ii)a consumer’s authorization to debit the consumer’s transaction or share draft account, in the amount of the advance plus a fee, where such account will be debited on or after a designated future date. . (b)

Clarification of liability

Section 130(a) of the Truth in Lending Act (15 U.S.C. 1640(a)) is amended by inserting after the penultimate sentence the following new sentence: Any creditor who violates section 128(e) with respect to any person shall be liable to such person under paragraphs (1), (2) and (3).. (c)

Federal reserve Board study of advertising and warning labels for high-interest loans

(1)

Study required

The Board of Governors of the Federal Reserve System shall conduct a study to determine the most effective way to require— (A)advertising of the finance charge and the annual percentage rate; and (B)the inclusion of a high-interest warning label, on all applications and contracts for credit (as defined in section 103 of the Truth in Lending Act) bearing interest at an annual percentage rate in excess of 36 percent. (2)

Report to the Congress

The Board of Governors of the Federal Reserve System shall submit a report to the Congress before the end of the 6-month period beginning on the date of the enactment of this Act containing the findings and conclusions of the Board with respect to the study required under subsection (a), together with such recommendations for legislative or administrative action as the Board may determines to be appropriate.

5.

Effective date

The requirements of this Act and the amendments made by this Act shall take effect at the end of the 90-day period beginning on the date of the enactment of this Act and shall apply to payday loans initiated on or after such date and to an extension or renewal of a payday loan made on or after such date.