[Congressional Record Volume 151, Number 131 (Monday, October 17, 2005)]
[Senate]
[Pages S11437-S11439]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. AKAKA:
  S. 1879. A bill to amend title 11, United States Code, to limit 
claims in bankruptcy by certain unsecured creditors; to the Committee 
on the Judiciary.


                    Bankruptcy Reform Implementation

  Mr. AKAKA. Mr. President, I opposed the bankruptcy reform bill 
because it was an outdated bill that failed to include adequate 
consumer protections. We saw a record number of consumer bankruptcy 
filing prior to the October 17 implementation deadline for the harsh 
new bankruptcy. Not enough was included in the legislation to protect 
consumers from predatory lenders or to make credit counseling a viable 
alternative to bankruptcy or to better inform over extended consumers 
about the true costs of their debts. I was disappointed that the Senate 
failed to effectively address these issues in a meaningful way, and 
instead, passed an outdated bill that forces working families into more 
costly and difficult bankruptcy proceedings. I am committed to making 
improvements in this flawed law.
  Today, I am introducing two bills that address flaws in the 
bankruptcy reform law. The first bill is the Predatory Payday Loan 
Prohibition Act. This bill would prevent federally-insured financial 
institutions from originating predatory payday loans. Payday loans are 
small cash loans repaid by borrowers' postdated checks or borrowers' 
authorizations to make electronic debits against existing financial 
accounts. Payday loan amounts are usually in the range of $100 to $500 
with full payment due in 2 weeks. Finance charges on payday loans are 
typically in the range of $15 to $30 per $100 borrowed, which 
translates into triple digit interest rates in the range of 390 percent 
to 780 percent when expressed as an annual percentage rate. Loan 
flipping, which is a common practice, is the renewing of loans at 
maturity by paying additional fees without any principal reduction. 
Loan flipping often leads to instances where the fees paid for a payday 
loan well exceed the principal borrowed. This situation often creates a 
cycle of debt that is hard to break.
  Industry analysts conservatively estimate that more than 15,000 
payday advance locations across America extend about $25 billion in 
short-term credit to millions of households experiencing cash-flow 
shortfalls. Too many of its customers are low-income, working families. 
More and more customers are the financially stretched middle class, 
including people who have maxed out their credit cards, people perhaps 
who have lost a job, or people with no savings to fall back on during a 
situation that causes a cash-flow shortfall, such as a medical 
emergency.
  Payday lending is also rampant in the military. One in five 
servicemembers have used payday lenders in the last year, according to 
the report, ``Payday Lenders Target the Military,'' by the Center for 
Responsible Lending. Payday lenders exploit people in financial need 
and profit enormously from these loans. We must act to protect 
vulnerable consumers from these predatory lenders.
  In addition, I previously introduced S. 1347, the Low-Cost 
Alternatives to Payday Loans Act. This bill would authorize award 
demonstration project grants for eligible entities to provide consumers 
with low-cost, small loan alternatives to more costly and predatory 
payday loans. Loan alternatives that meet the needs of consumers and 
are at a fair price must be developed.
  Today, I am also introducing the Bankruptcy Prevention Credit 
Counseling Act. The new bankruptcy reform law does not allow consumers 
to declare personal bankruptcy in either chapter 7 or chapter 13, 
unless they receive a briefing from an approved nonprofit credit 
counseling agency within 6 months of filing. The credit counseling 
instructional course requirement is intended to provide financial 
education to consumers who declare bankruptcy so they can attempt to 
avoid future financial problems.
  About one in three consumers in credit counseling enter a debt 
management plan. In exchange, creditors may agree to concessions so 
that consumers pay off as much of their outstanding debt as possible. 
Examples of concessions can include a reduced interest rate on the 
amount they owe and the elimination of fees. Unfortunately, most credit 
card companies have become increasingly unwilling to significantly 
reduce interest rates for consumers in credit counseling.
  The Bankruptcy Prevention Credit Counseling Act would prevent 
unsecured creditors, primarily credit card issuers, from attempting to 
collect accruing interest and additional fees from consumers in 
bankruptcy, if the creditor does not have a policy of waiving interest 
and fees for debtors who enter a consolidated payment plan at a credit 
counseling agency. Since the new bankruptcy law requires that consumers 
enter credit counseling before filing for bankruptcy, we must ensure 
that consumers are given a fair chance at reducing their debt burden.
  I also offered the text of the amendment of my bill, S. 393, the 
Credit Card Minimum Payment Warning Act, as an amendment to the 
bankruptcy bill. My amendment, intended to provide consumers with 
adequate, timely, and meaningful disclosures, was unfortunately 
defeated. As the bankruptcy reform law makes it more difficult for 
consumers to discharge their debts in bankruptcy, we have a 
responsibility to provide meaningful additional information so that 
consumers can make better informed debt management decisions. The 
bankruptcy reform law includes a requirement that credit card issuers 
provide a generic warning about the consequences of only making the 
minimum payment. This requirement fails to provide consumers the 
detailed information that my amendment would have provided, which means 
detailed, personalized information necessary for them to make better 
informed choices about their credit card use and repayment. My 
amendment would have required companies to inform consumers of how many 
years and months it would take to repay their entire balance, and the 
total cost in interest and principal, if the consumer makes only the 
minimum payment. My legislation would also have required consumers to 
be provided with the amount they would need to pay to eliminate their 
outstanding balance in 36 months. Finally, my legislation would have 
required that creditors establish a toll-free number so that consumers 
can access trustworthy credit counselors. In response to criticisms 
that my amendment was not feasible, I, along with

[[Page S11438]]

Senator Sarbanes, requested that the Government Accountability Office 
study the issue. I am hopeful the report will provide helpful 
information as we must continue to improve meaningful and 
understandable disclosures that will help Americans better manage their 
credit card debts.
  I want to take a moment to thank Senator Sarbanes, and his Banking 
Committee staff, for working with me on this and many other financial 
literacy related issues. In addition, I also want to thank Senator 
Leahy and the staff of the Judiciary Committee for all of their efforts 
to try and improve the flawed bankruptcy legislation.
  I fear that the bankruptcy reform law will significantly harm 
families who have suffered financially due to illnesses, the loss of a 
job, or the death of a loved one. I remain committed to working with 
all of my colleagues to better protect and inform consumers and to hold 
the credit card industry accountable for its aggressive marketing of 
credit to our debt burdened society.
  Mr. AKAKA. Mr. President, I rise to introduce the Predatory Payday 
Loan Prohibition Act of 2005. Currently, federal law authorizes insured 
depository institutions to export interest rates, as provided under the 
laws of the state where the bank or credit union is located, to out-of-
state borrowers. My bill would effectively eliminate the ability of 
financial institutions to do this by prohibiting federally-insured 
financial institutions from originating predatory payday loans.
  What constitutes a payday loan? These are small cash loans repaid by 
borrowers' postdated checks or borrowers' authorizations to make 
electronic debits against existing financial accounts. Payday loan 
amounts are usually in the range of $100 to $500 with payment in full 
due in two weeks. Finance charges on payday loans are typically in the 
range of $15 to $30 per $100 borrowed, which translates into triple 
digit interest rates in the range of 390 percent to 780 percent when 
expressed as an annual percentage rate. Loan flipping, which is a 
common practice, is the renewing of loans at maturity by paying 
additional fees without any principal reduction. Loan flipping often 
leads to instances where the fees paid for a payday loan well exceed 
the principal borrowed. This situation often creates a cycle of debt 
that is hard to break. Today, industry analysts conservatively estimate 
that more than 15,000 payday advance locations across America extend 
about $25 billion in short-term credit to millions of households 
experiencing cash-flow shortfalls.
  I am appalled that the payday lending industry is portrayed as a 
legitimate business. Too many of its customers are low-income, working 
families. More and more customers are the financially stretched middle 
class including people who have maxed out their credit cards, people 
perhaps who have lost a job, or people with no savings to fall back on 
during a situation that causes a cash-flow shortfall, such as a medical 
emergency. Payday lending is also rampant in the military. One in five 
servicemembers have used payday lenders in the last year, according to 
the report, ``Payday Lenders Target the Military,'' by the Center for 
Responsible Lending. Payday lenders are concentrated around military 
bases, such as the Navy bases in Norfolk, Virginia, the Army's Fort 
Lewis in Washington State, and the Marine Corps base at Camp Pendleton 
in California. The Department of Defense confirms the Center's report 
by listing payday lending as one of the top 10 priority issues facing 
military families, according to Dr. David Chu, the Under Secretary of 
Defense for Personnel and Readiness. To the predatory lenders, our 
military personnel's government paychecks represent a reliable source 
of fees. Also, payday lenders can be relatively confident that 
borrowers will continue to pay, because military personnel face harsh 
consequences, such as court martial or dishonorable discharge, for not 
repaying their debts. I am pleased that in my home state a local credit 
union, Windward Community Federal Credit Union, Kailua, Hawaii, has 
developed an affordable, alternative product to offer the many Marines 
who live in its service area. Earlier this year I introduced another 
bill to encourage replication of such practices. S. 1347, the Low-Cost 
Alternatives to Payday Loans Act, would authorize demonstration project 
grants to eligible entities to provide low-cost, small loans to 
consumers that would provide alternatives to more costly, predatory 
payday loans so that more people could have access to payday loan 
alternatives.
  Payday loan providers claim that they are offering a simple financial 
product that addresses an emergency or temporary credit need that 
usually cannot be met by traditional financial institutions. An 
analysis of payday lending statistics by the Center for Responsible 
Lending indicates that the majority of payday loan borrowers have 
multiple loans each year with two thirds having five or more payday 
loans annually and half of these borrowers having 12 or more payday 
loans annually. Some borrowers seek loans from two or more payday 
lenders, multiplying the potential for getting trapped in debt. 
Research by the Community Financial Services Association of America, 
the payday loan industry's national trade association, found that 40 
percent of payday loan customers renew their payday loans a staggering 
five times or more.
  The payday loan industry exploits people that are in financial need. 
Congress has failed to act to prevent the exploitation of working 
families that are short on cash due to unexpected medical expenses or 
other needs. We must act to protect consumers from these unscrupulous 
lenders. I remain committed to restricting all forms of predatory 
lending, including payday loans, and I encourage my colleagues to 
support this legislation.
  Mr. President, I ask unanimous consent that the text of the bill and 
a letter of support be printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                                S. 1878

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Predatory Payday Loan 
     Prohibition Act of 2005''.

     SEC. 2. PROHIBITION ON CREDITORS MAKING PAYDAY LOANS.

       The Truth in Lending Act (15 U.S.C. 1601 et seq.) is 
     amended by inserting after section 109 the following:

     ``SEC. 110. PROHIBITION ON PAYDAY LOANS.

       ``(a) In General.--A creditor may not make a payday loan to 
     any person, if the creditor knows or has reasonable cause to 
     believe that--
       ``(1) the personal check or share draft that the creditor 
     receives from the person in exchange for the loan is drawn on 
     an insured depository institution or an insured credit union; 
     or
       ``(2) the account that will be debited in exchange for the 
     loan is a transaction account or share draft account at an 
     insured depository institution or an insured credit union.
       ``(b) Definitions.--In this section, the following 
     definitions shall apply:
       ``(1) Insured institutions.--The terms `insured depository 
     institution' and `insured credit union' have the meanings 
     given those terms in section 3 of the Federal Deposit 
     Insurance Act and section 101 of the Federal Credit Union 
     Act, respectively.
       ``(2) Payday loan.--The term `payday loan' means any 
     transaction in which a short-term cash advance is made to a 
     consumer in exchange for--
       ``(A) the personal check or share draft of the consumer, 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) the authorization of a consumer to debit the 
     transaction account or share draft account of the consumer, 
     in the amount of the advance plus a fee, where such account 
     will be debited on or after a designated future date.''.

     SEC. 3. PROHIBITION ON INSURED DEPOSITORY INSTITUTIONS MAKING 
                   PAYDAY LOANS.

       Section 18 of the Federal Deposit Insurance Act (12 U.S.C. 
     1828) is amended by adding at the end the following:
       ``(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) the personal check or share draft of the consumer, 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

[[Page S11439]]

       ``(B) the authorization of the consumer to debit the 
     transaction account or share draft account of the consumer, 
     in the amount of the advance plus a fee, where such account 
     will be debited on or after a designated future date.''.
                                  ____

                                                  October 6, 2005.
     Hon. Daniel K. Akaka,
     U.S. Senate,
     Washington, DC.
       Dear Senator Akaka: Consumer Federation of America, 
     Community Reinvestment Association of NC, Consumer Action, 
     Consumers Union, National Community Reinvestment Coalition, 
     National Consumer Law Center and U.S. PIRG applaud you for 
     sponsoring legislation to prohibit lending based on checks or 
     debits drawn on federally insured depository institutions. 
     You have recognized that it is an unsafe banking practice for 
     consumers to be enticed by payday lenders to write checks or 
     authorize debits when there is no money on deposit to cover 
     these cash advances. We are also pleased that your bill would 
     prohibit banks from partnering with payday lenders, a tactic 
     used by storefront lenders to evade state small loan and 
     usury laws.
       The ``Predatory Payday Loan Prohibition Act of 2005'' 
     prohibits the relatively new practice of holding a check as 
     security for a loan. Using the check as security for the 
     payment of a payday loan is the key to the coercive 
     collection tactics used by the lenders. As the lender holds 
     the check, at the end of the short term loan, the consumer is 
     generally forced to choose among three untenable options: 1) 
     allowing the check to be debited from their bank account 
     where it will deplete money needed for food and other living 
     necessities, 2) allowing the check to bounce, exposing the 
     borrower to coercive collection tactics when lenders threaten 
     civil or criminal liability for unpaid checks, and from the 
     risk of losing their bank account or checkwriting privileges, 
     or 3) renewing the loan at the original high cost. Loans 
     based on personal checks drawn on the borrower's bank account 
     that will be deposited to repay the loan on the next payday 
     is the modern version of lending secured by wage assignments, 
     a credit practice long recognized as inherently unfair which 
     violates FTC rules.
       Your legislation also stops payday lenders from partnering 
     with federally insured depository institutions to evade state 
     usury or small loan rate caps. A few federally insured state 
     chartered banks persist in ``renting'' their charters to 
     payday lenders, a practice curtailed by most federal bank 
     regulators, to make loans in states that enforce their usury 
     or small loan laws.
       Although payday lender-bank charter renting has been 
     curtailed by regulatory action, only legislation will create 
     a clear prohibition to stop this practice that undermines 
     state small loan regulation.
           Sincerely,
     Jean Ann Fox,
       Director of Consumer Protection, Consumer Federation of 
     America.
     Peter Skillern,
       Executive Director, Community Reinvestment Association of 
     NC.
     Linda Sherry,
       Director, National Priorities, Consumer Action.
     Susanna Montezemolo,
       Policy Analyst, Consumers Union.
     Monica Gonzales,
       Vice President of Legislation and Regulatory Affairs, 
     National Community Reinvestment Coalition.
     Margot Saunders,
       Of Counsel, National Consumer Law Center.
     Ed Mierzwinski,
       Consumer Program Director, U.S. Public Interest Research 
     Group (U.S. PIRG).

  Mr. AKAKA. Mr. President, I rise to introduce the Bankruptcy 
Prevention Credit Counseling Act. The new bankruptcy reform law does 
not allow consumers to declare personal bankruptcy in either Chapter 7 
or Chapter 13, unless they receive a briefing from an approved 
nonprofit credit counseling agency within 6 months of filing. The 
credit counseling instructional course requirement is intended to 
provide financial education to consumers who declare bankruptcy so they 
can attempt to avoid future financial problems.
  About one in three consumers in credit counseling enter a debt 
management plan. In exchange, creditors may agree to concessions so 
that consumers pay off as much of their outstanding debt as possible. 
Concessions can include a reduced interest rate on the amount they owe 
and the elimination of fees. Unfortunately, most credit card companies 
have become increasingly unwilling to significantly reduce interest 
rates for consumers in credit counseling. A study by the National 
Consumer Law Center and the Consumer Federation of America revealed 
that 5 of 13 credit card issuers increased the interest rates they 
offered to consumers in credit counseling between 1999 and 2003. 
American Express and Wells Fargo completely waive all interest for 
consumers in credit counseling. However, the majority of credit card 
issuers charge interest rates above 9 percent for account holders that 
enter into credit counseling, with several charging more than 15 
percent.
  My bill would prevent unsecured creditors, primarily credit card 
issuers, from attempting to collect accruing interest and additional 
fees from consumers in bankruptcy, if the creditor does not have a 
policy of waiving interest and fees for debtors who enter a 
consolidated payment plan at a credit counseling agency.
  Since the new bankruptcy law requires that consumers enter credit 
counseling before filing for bankruptcy, we must ensure that credit 
counseling is truly effective and a viable alternative to bankruptcy. 
Credit card issuers undermine the good intentions of those consumers. 
They have sharply curtailed the concessions they offer to consumers in 
credit counseling, contributing to increased bankruptcy filings. 
According to a survey by VISA USA, 33 percent of consumers who failed 
to complete a debt management plan in credit counseling said they would 
have stayed on the plan if creditors had lowered interest rates or 
waived fees. Credit card companies have an obligation to ensure that 
effective alternatives are readily available to the consumers they 
aggressively pursue.
  We must make sure that credit counseling is an effective tool to help 
consumers avoid bankruptcy. In order to do this, credit card issuers 
should waive the amount owed in interest and fees for consumers who 
enter a consolidated payment plan. Successful completion of a debt 
management plan benefits both creditors and consumers. Mr. President, 
for many consumers, paying off their debt is not easy. My bill will 
help people who are struggling to repay their obligations. I encourage 
all of my colleagues to support this legislation to help consumers 
enrolled in debt management plans to successfully repay their 
creditors, free themselves from debt, and avoid bankruptcy.
  I ask unanimous consent that the text of the bill be printed in the 
Record.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                S. 1879

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Bankruptcy Prevention Credit 
     Counseling Act of 2005''.

     SEC. 2. REDUCTION OF UNSECURED CLAIMS.

       Section 502(b) of title 11, United States Code, is 
     amended--
       (1) in paragraph (8), by striking ``or'' at the end;
       (2) in paragraph (9), by striking the period at the end and 
     inserting ``; or''; and
       (3) by adding at the end the following:
       ``(10) such consumer debt is an unsecured claim arising 
     from a debt to a creditor that does not have, as of the date 
     of the order for relief, a policy of waiving additional 
     interest for all debtors who participate in a debt management 
     plan administered by a nonprofit budget and credit counseling 
     agency described in section 111(a).''.

                          ____________________