[Congressional Record (Bound Edition), Volume 146 (2000), Part 2]
[Extensions of Remarks]
[Pages 2062-2063]
[From the U.S. Government Publishing Office, www.gpo.gov]



     INTRODUCTION OF THE ``FEDERAL PAYDAY LOAN CONSUMER PROTECTION 
                    AMENDMENTS OF 2000''--H.R. 3823

                                 ______
                                 

                          HON. JOHN J. LaFALCE

                              of new york

                    in the house of representatives

                        Thursday, March 2, 2000

  Mr. LaFALCE. Mr. Speaker, I am today introducing the ``Federal Payday 
Loan Consumer Protection Amendments of 2000'' (H.R. 3823) to address 
the problems of high cost ``payday'' lending. My legislation responds 
to consumer group studies that reveal how the rapidly expanding payday 
loan industry seeks to trap thousands of consumers each year in 
hopeless cycles of perpetual debt.
  For some time now, I have been concerned that we are seeing the 
development of a dual financial services structure in this country--one 
for middle and upper income individuals that involves traditional 
regulated and insured financial institutions; a second for lower-income 
households and people with impaired credit that involves higher cost 
services from lesser-regulated entities check cashers, pawn shops and 
other quasi-financial entities.
  For these lower-income Americans, traditional banking and credit 
services either are not affordable or readily available. Other entities 
have stepped in to take their place. Where these institutions act 
responsibly, they provide an important service that otherwise might not 
exist. But too often they are providing services

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at far higher cost, and at more onerous terms, than the services made 
available to higher income people. Certainly, I understand the concept 
of pricing for risk. But there is a clear difference between pricing 
for risk and simply taking advantage of people in desperate need.
  In my mind, payday loans exemplify the worst aspects of the growing 
disparity between these primary and secondary markets for financial 
services. Payday loans are high-cost, short term loans that use a 
borrower's personal check as collateral. These loans are made to cash-
strapped consumers without any assessment of ability to repay, other 
than the ability to write a post-dated check. Since they are borrowing 
against their next paychecks, and the debt is due all at once in a lump 
sum, a large percentage of borrowers can't repay the debt and end up 
having to roll over the debt again and again, paying exorbitant fees 
and interest costs for the same borrowed funds.
  The cost of a typical payday loan is $15 to $17.50 for each $100 
advanced over a two-week period. This translates into comparable annual 
percentage rates (APR) of 390% to 465% for a two-week loan. If the loan 
is extended over multiple two-week periods, the finance costs rapidly 
escalate, often exceeded 2000%. The Illinois Department of Financial 
Institutions reported last year that the typical payday customer 
``remains a customer for at least 6 months,'' averaging over 11 loan 
extensions. Indiana financial regulators found that only 9% of payday 
loans are not rolled over and that the average customer typically had 
ten loan renewals.
  U.S. PIRG recently calculated the cost of borrowing $200 from three 
widely available credit sources: a cash advance on a high-rate credit 
card, a loan under a typical state small loan interest cap of 35% and a 
typical payday loan. Over the period of a single month, the total 
charges for a payday loan, at $70, were 8 times higher than the nearest 
alternative, $8.41 for the credit card advance. Over three months, 
charges for the payday loan, at $210, were nearly 18 times higher than 
the closest alternative, the $12.10 paid for the high rate small loan.
  Unfortunately, an accurate assessment of these costs is rarely 
provided to payday loan customers. The Truth in Lending Act (TILA) 
requires creditors to provide customers with complete and accurate 
estimates of credit costs, including comparable APR figures that permit 
comparison with other credit alternatives. Congress intended that TILA 
disclosure requirements apply very broadly to all forms of credit, 
including short-term payday loans. The fact that payday lenders 
continue to resist making accurate cost disclosures, with repeated 
unsuccessful challenges of TILA's application in court, indicates to me 
that their intent of deceiving people into borrowing at rates far 
higher than necessary and far higher than most can afford.
  The fact that payday lenders can threaten to cash a borrower's check, 
or even threaten criminal prosecution for intentional writing of a bad 
check, leaves borrowers with few options but to roll over the debt or 
default on other debts to pay off the payday loan. Because payday loans 
by definition leave the borrower unable to repay all their debts, the 
use of postdated checks becomes an effective tool in forcing borrowers 
to pay the payday lender first. Industry sources openly acknowledge 
that ``the potential for future (bad check) charges and/or loss of 
check-writing privileges'' clearly motivates borrowers to pay off 
payday loans first, while defaulting on other obligations.
  Unfortunately, most payday lenders are not federally regulated 
entities, and regulation of small loan interest rates has traditionally 
fallen within State jurisdiction. A large number of states, including 
my home state of New York, have in place small loan rate caps, usury 
ceiling or other restrictions to prohibit payday loans or limit their 
worst abuses. But these states are now under significant pressure from 
the rapidly expanding payday lending industry. In 19 states, the payday 
loan industry has carved out special exemptions from state interest 
caps or enacted specific payday loan ``regulatory'' statutes that are 
written to benefit the industry, not consumers.
  In states where the industry's lobbying tactics have failed, payday 
lenders either try to disguise these transactions, calling them service 
fees or sale-leaseback transactions, or they have
  The recent entry of insured national banks into payday lending is 
extremely troubling to me. I do not think institutions that benefit 
from a public charter, access to the federal payment system and federal 
deposit insurance should engage in lending that does not properly 
assess borrowers' ability to repay, that encourages writing of bad 
checks on accounts with other institutions, that seeks to trap 
borrowers in perpetual debt, that encourages default on obligations 
with other lenders, or that facilitates violations of state lending 
law. These are unacceptable activities for insured federal institutions 
that threaten the safety and soundness not only of the institution, but 
the entire banking system. Moreover, federal institutions have an 
obligation under the Community Reinvestment Act to serve all consumers 
in their surrounding community, not seek to exploit the most 
disadvantaged.
  I believe Congress has a two-fold responsibility in this area. First, 
we must continue to address the inadequacies of the financial 
marketplace that fuel the growth of payday lending and other abusive 
practices. We have helped to make credit union services available to 
more people in financially underserved communities in the 1998 Credit 
Union Membership Access Act. The Treasury Department has recently 
implemented a Congressional mandate to make low-cost electronic 
transfer accounts available to all unbanked federal beneficiaries. And 
President Clinton has requested funding to implement new initiatives to 
make affordable ``first account'' banking services available to low-
income households.
  Second, we need to act decisively to restrict the abusive practices 
of payday lenders. At a minimum, we must keep federally regulated and 
insured institutions out of the business of payday lending, both to 
promote safe and sound banking practices and to eliminate the national 
bank ``loophole'' that permits payday lenders to circumvent state 
lending laws. But we need to much more--we must end the ``indirect'' 
involvement of insured institutions in payday lending by the fact that 
checks and other withdrawal on their accounts are being used by others 
as the basis for making and enforcing payday loan transaction. We also 
must make explicitly clear the fact that Truth in Lending Act 
disclosures and protections apply, and have always applied, to all 
payday loans.
  The legislation I am introducing today will make four important 
changes in current law with regard to payday loans. First, it prohibits 
all federally insured banks and thrifts from engaging directly, or 
indirectly through other lenders, in any form of payday lending. 
Second, it makes explicit Congress' intent that Truth in Lending Act 
protections apply to payday loan transactions, by specifically listing 
payday loans within TILA's definition of credit and providing a uniform 
federal definition of what constitutes a payday loan to eliminate 
future ambiguity.
  Third, it amends current law to prohibit uninsured lenders from 
making any payday loan using a personal check or other written or 
electronic debit authorization on an account with an insured 
institution. Finally, the bill increases civil penalties under the 
Truth in Lending Act to provide a stronger deterrent to discourage 
abusive practices.
  Mr. Speaker, Congress has spent a great deal of time in recent years 
creating a new, more flexible financial services structure that permits 
financial institutions to take full advantage of evolving technologies 
and changing market opportunities. Our challenge in future years will 
be to assure the benefits of these new structure will be equally 
available in all communities and to all consumers. I consider the 
``Federal Payday Loan Consumer Protection Amendments of 2000'' a first 
step toward meeting this challenge. I urge its prompt consideration and 
adoption.

                          ____________________