Consumer Federation of America
1424 16th Street, NW, Suite 604
Washington, DC 20036
(202) 387-6121

Consumers Union(1) (CU) and Consumer Federation of America(2) (CFA) appreciate the opportunity to comment on the proposed rule to authorize deferred presentment transactions, 7 TAC §1.605, published in the Texas Register on May 12, 2000, at 25 TexReg 4259.

Authorizing deferred presentment transactions raises significant public policy concerns. We reiterate the concerns we raised in our March 31, 2000, comments about adopting rules that will permit a loan that uses a borrower's personal check held to repay the loan. Notwithstanding the public policy concerns regarding authorizing payday lending in Texas, there are specific problems in the proposed rules that should be addressed before the rules are finally adopted.

CU and CFA filed comments with the Finance Commission on the previous version of these rules and by reference incorporate those comments into these. A copy of those comments is attached. We reiterate our concerns outlined in our previous comments, but will limit these comments to changes made in the proposed rules.

The use of a personal check as the basis of a loan is the reason payday loans are inherently coercive. If Texas is to legitimize payday lending, regulators must protect borrowers from coercive tactics made possible by live checks in the hands of lenders. One such practice is the threat of criminal hot check collection by a lender when a loan becomes due.

The proposed rule specifically requests comments on whether §1.605(f)(2) should retain the word "civil" in describing the means a lender may use to collect a debt. We strongly urge the Finance Commission to retain the word "civil" in this section, since it accurately describes the rights of lenders and, if removed, may lead some lenders to the incorrect assumption that other means of collection are authorized - means that are contrary to Texas law.

Although deliberately writing a check without money in the bank to cover may violate hot check laws, a lender accepting a post-dated check removes the intent to defraud. It is clear under Texas law that using the state's hot check criminal laws to enforce a payday loan is not permitted. In fact, the use or threat of use by lenders of invoking criminal hot check laws itself may violate the law.

Texas Penal Code §32.41 states that a person commits an offense:

if he issues or passes a check or similar sight order for the payment of money knowing that the issuer does not have sufficient funds in or on deposit with the bank or other drawee for the payment in full of the check or order as well as all other checks or orders outstanding at the time of issuance.(3)

Texas Penal Code §31.06 provides a presumption for theft by check if the actor obtained property or secured performance of service by check unless the check is postdated.(4)

As the language of the statutes indicates, the difference between an ordinary bounced check and the crime of either writing a worthless check, or theft by check, is intent. For purposes of interpreting the criminal statutes, the relevant time to look at the maker's intent is the time at which the check is written.(5)

As a general rule, the very fact of post-dating a check "purged the transaction of its criminal character." Instead, it implied that there were at the time of making the check no funds to pay, and the check instead "represents a promise to discharge a present obligation on a future date."(6)

Absent fraudulent intent, the transaction becomes essentially one of extending credit to the drawer. If the payee of a postdated, worthless check indicates in some manner that his or her acceptance of the check constitutes an extension of credit to the maker, the transaction does not violate the bad check statute.(7)

Texas has long required the essential element of intent be alleged and proved before a criminal cause of action for theft is permitted.(8) Moreover, it is well settled in Texas that a postdated check given with the knowledge of all parties obviates criminal prosecution. "When any person gave a post-dated check, draft, or order and when such fact was understood by all parties to the transaction, such person was not criminally liable though the check, draft, or order was later returned because of insufficient funds or any other similar reason."(9)

For example, it is not reasonable to believe or assume that a consumer would give a $118.00 check to another person in exchange for $100.00 in cash if the consumer had $100.00 in cash in his checking account at the time. Thus, the lender was aware that the borrower to whom money was advanced did not have sufficient funds in the checking account at the time to cover the amount of the cash advanced, much less the total amount of the check.(10) The borrower cannot be prosecuted criminally in Texas for either writing a worthless check or theft by check because they do not possess the required intent.

The Texas Debt Collection Act prohibits a debt collector from "threatening to file a charge, complaint, or criminal action against a debtor when the debtor has not violated a criminal law."(11) Therefore, generally, it is a violation of the Texas Debt Collection Act for a lender to threaten criminal check collection.

Unlike situations in which a merchant holds a check in exchange for merchandise, a check transferred in a payday loan is intended as part of the loan instrument, and the transaction should be regulated as a consumer loan. The fact that these transactions are loans that happen to be evidenced by checks, means that a lender holding a dishonored check may not collect charges in excess of those allowed by the Texas Credit Code for regulated consumer loans.

In fact, even the payday loan industry opposes the use and threat of criminal prosecution. In the National Check Cashers Association Deferred Deposit Services Professional Code Of Ethics, the organization states that it:

. . . is dedicated to the provision of honest, efficient and courteous financial services to all in the communities served by our members. To encourage these practices in connection with deferred deposit services made available by our industry, NaCCA has formulated this Professional Code of Ethics.

Our members are committed to: . . .

. . . 11. Avoiding unfair and coercive collection practices, including improper threats to institute criminal prosecutions for checks deposited on a deferred basis and dishonored.

Despite the industry association's statement, there are incidents across the country of unscrupulous payday lenders that use, or threaten to use, criminal laws to enforce their loans.(12) Removing the word "civil" in this section may provide a defense for an unscrupulous lender who wishes to use inappropriate means to collect on a loan.

The word "civil" in §1.605(f)(2) should be retained in the proposed rule. Since under Texas law a deferred presentment contemplated under the proposed rules cannot be used as a basis for criminal prosecution, the rule should not appear to inappropriately expand Texas hot check collection criminal law. In addition, to assist lenders in understanding their responsibility in complying with Texas law, including the Texas Debt Collection Act, the word "civil" should be retained and bulletins explaining lenders duties under Texas law should be issued.

Proposed §1.605(d) sets a minimum term of seven days. Instead of payday loans being installment loans, they are balloon payment transactions with the full principal and interest due. §342.253 permits single repayment loans for less than one month but does not specify loans as short as seven days.

While a weekly payment schedule might help a consumer paid on a weekly basis to successfully repay a small installment loan, a seven-day term for a single payment payday loan is not appropriate. As in our previous comments, we urge a payday loan term of at least 14 days, or the borrower's next pay period, to assist consumers in successfully repaying the loan without the need to refinance or rollover the loan. Consistent with the Finance Commission's standard that a lender make a good faith effort to evaluate the borrower's ability to repay, as established in 7 TAC §1.11, lengthening the payment schedule to 14 days, or the borrower's next pay period, will assure that a borrower can repay the loan.

Many borrowers are not paid on a weekly basis. Only about half of workers are paid weekly. Forty-five percent of workers are paid bi-weekly, semi-monthly, or monthly.(13) Texas law requires an employer to pay an exempt employee at least once a month. For non-exempt employees, the law requires payment to be designated by employers, at least twice a month, but if they do not make a designation, the paydays are the first and fifteenth day of each month.(14) Employees of the State of Texas are paid only once a month. It is unconscionable to loan money to consumers who have no expectation of being able to repay under the terms of the loan. A seven-day term for a payday loan is per se unconscionable.

Short payday loan terms have caused problems in other jurisdictions. In Indiana, regulators found, of the 47 licensees examined, 38 had used loan terms of seven days or fewer.(15) In fact, borrowers who have multiple loans from numerous lenders is a problem in other states.(16)

Since a large number of borrowers are not paid on a weekly basis, a lender choosing to set a term shorter than the borrower's next paycheck will create a hardship for borrowers. A repayment cycle shorter than the borrower's pay cycle will necessarily force the borrower to renew or take out a separate loan from another lender to repay the original loan, worsening the borrower's debt situation.

The changes made in this version of the proposed rules, in §1.605(f)(1), will ameliorate this problem to some degree, minimizing additional costs for a borrower. We support these changes. However, increasing the term to a minimum of 14 days, or the borrower's next pay period, will lower effective interest rates and will assure that more borrowers go through a pay cycle that will give them the funds necessary to repay the loans. This change is consistent with the standard that the lender make a good faith effort to evaluate a borrower's ability to repay.

We applaud the Finance Commission's change to the proposed rule dealing with the collection by lenders of an acquisition, or "installment account handling" charge. The alternate interest charge provision in Texas law appears to have been intended to apply to installment loans, not single-payment loans, since it is referred to as an installment account handling charge.

Because a customer's account is only set up one time, and because a these loans are single-payment loans, we believe it is inappropriate to allow the installment account handling charge more than one time. We urge you to modify the proposed rule to allow the collection of the fee only once.

Payday loan borrowers may require additional assistance in managing their finances. Evidence points to the fact that payday loans get paid before other debts. While this is partially explained by the coercive nature of the lender holding the borrower's check, it indicates that a borrower's finances may be beyond his or her control.

Such borrowers should be given information, as part of the lender's required disclosure, about how to get assistance in managing their debt. We propose adding an additional disclosure to §1.605(e)(2) to provide borrowers with contact information for nonprofit consumer credit counseling in their area. The additional disclosure should read as follows:

If you are having trouble managing your debt, you may want to contact your local nonprofit consumer credit counseling service. They may be able to work out payment plans and help get your debt under control. You can reach them at [insert phone number for nearest nonprofit consumer credit counseling agency].

Because of the history of abuses of payday loan borrowers that are well-documented in other states, Texas regulators should design Texas' system to be sure there is adequate oversight of lenders. Lenders who make these loans should report them separately and perhaps have a unique identifier or endorsement on their license that will allow regulators and the public to know how many lenders are making this unique type of loan. In addition, special record keeping provisions and reporting requirements should be implemented to monitor the volume of these loans and to give auditors a way to be sure that lenders are complying with state regulations, particularly regulations that affect how a loan may be refinanced.

Such provisions do not necessarily have to be included with the implementing regulations, but should be implemented immediately, possibly in the form of a regulatory bulletin. This will allow licensees making payday loans to set up record keeping systems that will allow regulators to monitor compliance with Texas law and these regulations.

§1.605(f)(1) appears to contain a typographical error. Removing the word "either" from the sentence may correct the error. The section should be amended as follows:

(f) Conditions. A lender may accept a check to secure payment of a payday loan if the lender complies with the following sections.

(1) Duplicate and multiple loans. The provisions of Texas Finance Code, §342.501 and 7 TAC §1.851 apply to loans made under the authority of this section. In accordance with Texas Finance Code, §342.501 a lender and a borrower may renew a loan, but the loan must either be converted from a single payment balloon loan to a declining balance installment note.

We appreciate the changes the Finance Commission has made to improve the rules. Though we continue to have concerns about the wisdom of permitting loans based on personal checks, we believe additional changes to the rule, as outlined above, are important to protect Texas consumers.

We appreciate the opportunity to submit comments regarding proposed 28 TAC §1.605.

__________________

(1) Consumers Union is a nonprofit membership organization chartered in 1936 under the laws of the state of New York to provide consumers with information, education, and counsel about goods, services, health, and personal finance; and to initiate and cooperate with individual and group efforts to maintain and enhance the quality of life for consumers. Consumers Union's income is solely derived from the sale of Consumer Reports, its other publications and from noncommercial contributions, grants and fees. In addition to reports on Consumers Union's own product testing, Consumer Reports, with approximately 4.6 million paid circulation, regularly carries articles on health, product safety, marketplace economics, and legislative, judicial, and regulatory actions which affect consumer welfare. Consumers Union's publications carry no advertising and receive no commercial support.

(2) Consumer Federation of America is a proconsumer association of about 260 organizations that represent 50 million consumers. CFA was founded in 1966 to advocate for consumers.

(3) TEX. PENAL CODE §32.41 (Vernon Supp. 1999). (emphasis added).

(4) TEX. PENAL CODE §31.06 (Vernon 1994). (emphasis added).

(5) Brown v. Parrata Sales, Inc., 521 S.W. 2d 359 (Tex.Civ. App.--Dallas 1975, no writ).

(6) 32 Am Jur 2d § 73, False Pretenses. See also Annotation, Application of "Bad Check" Statute with Respect to Postdated Checks, 52 A.R 3d 464 (1973).

(7) 32 Am Jur 2d §73, False Pretenses.

(8) Guest v. State, 5 S.W. 840 (1887); Willis v. State,6 S.W. 856 (1888).

(9) Op. Texas Atty. Gen. No. 0-2334 (1940).

(10) Turner, 35 F. Supp. 1042, 1051.

(11) TEX. FIN. CODE ANN. §392.301(a)(6) (Vernon 1998).

(12) The Cook County States Attorney and the Illinois Department of Financial Institutions recently settle a case against a payday lender allegedly mailing out fake warning letters to delinquent borrowers. The Cook County State's Attorney quoted a page from Nationwide Budget Finance Inc. manual that instructed company employees to call all personal references and warn them that Nationwide would have a warrant issued for the customer's arrest.

The Georgia Court of Appeals upheld a conviction against the operators of two payday lending companies who were found guilty of violating the state RICO law, including thirteen counts of perjury for swearing out of arrest warrants for the offense of "bad check," threats of violence and arson.

A California payday lender that makes payday loans in partnership with a bank sent a delinquent customer a letter threatening to file a "worthless document report" with the local police department, to report the debt to TRW to stay on the credit report for up to ten years, to report the returned check to Tele-Check, a company used by retail stores to screen customers who pay by check, and to notify the Social Worker for welfare or social security of unreported income.

A class action lawsuit filed in Arkansas alleges threats made by a payday lender to turn over the consumer to the Prosecuting Attorney and that legal action would be taken if she did not continue making payments to the company. To avoid these consequences, the consumer paid $832.73 in interest on her $300 loan without any reduction in principal.

(13) Lois Plunkert, Bureau of Labor Statistics/Current Employment Data Statistics Unit, data from the end of 1997 shows 54 percent of workers are paid weekly, 28 percent bi-weekly, 11percent semi-monthly, and six percent monthly.

(14) §§61.011, 61.012, TEX. LABOR CODE.

(15) Indiana Department of Financial Institutions, Summary of Payday Lender Examinations. Indiana Regulator's Survey of most recent 12 months prior to examination dates 7/99 - 10/99.

(16) Even as regulators attempt to limit the number of renewals a borrower makes, it is very difficult to monitor whether a borrower already has loans outstanding from other lenders. In a survey of credit counselors in California, Washington, Nevada, Oregon, Idaho and Montana, 50 borrowers answered questions about payday loan use, family income, and collection practices. Half of the respondents had taken out nine or more payday loans in the last year and 40% borrowed from five or more payday lenders. Testimony of Jean Ann Fox before the Forum on Payday Lending, Senator Joseph I. Lieberman, December 15, 1999.

(17) In a recent update, Stephens Inc. noted that other lenders, such as low-balance credit card issuers, small loan finance companies, and pawn shops will be at risk of becoming subordinated to the payday advance companies in terms of payment priority. Gerald Lewis, "Non-bank Financial Services Industry Notes," Stephens Inc., March 23, 2000, p. 7.

Consumers Union's Southwest Regional Office

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