HBA-JLV H.B. 1366 77(R) BILL ANALYSIS Office of House Bill AnalysisH.B. 1366 By: Solomons Financial Institutions 2/21/2001 Introduced BACKGROUND AND PURPOSE A deferred deposit loan or payday loan is a small consumer loan for a short period of time that is secured by the borrower's personal check (instrument) and is currently an unregulated lending practice. There are concerns that lenders of deferred deposit loans charge high interest rates that help create a cycle of debt from which low-income consumers may find it difficult to escape. Additionally, if a borrower is unable to repay the loan at the expiration of the loan period, the lender may extend the loan period (renewal) if the borrower agrees to pay an additional interest rate, which again may be at an elevated rate. However, if the borrower does not wish to extend the loan period, the lender can deposit the original personal check, knowing that the borrower possess insufficient funds to cover the check. When the check is returned due to insufficient funds, some lenders have been known to turn the check over to their local criminal justice system for criminal prosecution as a hot check. These practices have raised concerns regarding the lack of regulation on deferred deposit loans or payday loans. House Bill 1366 provides regulatory requirements for businesses and lenders offering deferred deposit loans. RULEMAKING AUTHORITY It is the opinion of the Office of House Bill Analysis that this bill does not expressly delegate any additional rulemaking authority to a state officer, department, agency, or institution. ANALYSIS House Bill 1366 amends the Finance Code to regulate deferred deposit loan (loan) transactions. The bill requires each loan transaction and renewal to be documented by a written agreement and requires a lender to provide a notice to potential borrowers containing the purpose of the loan (Secs. 342.602 and 342.603). The bill authorizes a lender to charge, for each loan, a finance charge not to exceed $15 for every $100 advanced (Sec. 342.604). The bill requires a lender to post a notice informing potential borrowers of the lender's prohibition on advancing a loan amount that is greater than $500 and the right of the borrower to rescind the loan no later than 5 p.m. on the next business day following the loan transaction (Secs. 342.605 and 342.607). The bill prohibits a lender from engaging in a loan with a term of more than 31 days (Sec. 342.606). The bill prohibits a borrower from renewing a loan more than three consecutive times and if the borrower does not pay the debt, the lender may deposit, negotiate, or present for payment the borrower's instrument. The bill authorizes a lender to assess additional finance charges not to exceed $15 for every $100 advanced on a renewal of a loan. Upon completion of a transaction, the bill authorizes the lender to enter into a new loan agreement with the borrower (Sec. 342.608). The bill authorizes a lender to pay the proceeds from a loan to the borrower in the form of a business instrument, a money order, or cash. The bill prohibits the lender from charging the borrower an additional finance charge or fee for cashing the lender's business instrument (Sec. 342.609). The bill requires a lender offering a loan to post a notice of the charges imposed for the loan and to maintain records and file an annual report with the consumer credit commissioner (commissioner) (Secs. 342.613 and 342.615). The bill grants authority to conduct a loan business only to authorized and licensed lenders and requires the lender to obtain and maintain a separate license for each location where loan business is conducted (Sec. 342.616). The bill requires the commissioner to notify a lender of any violations and the actions the lender must take to cure the violations, if a commissioner finds that a lender has violated any provisions of the bill. Once the lender has cured the violations, the lender shall not be subject to further disciplinary action, unless the lender knowingly committed the violations (Sec. 342.618). The bill prohibits a borrower from being held subject to any criminal penalty for participation in a loan agreement, unless the borrower has made a false statement to obtain credit (Sec. 342.621). EFFECTIVE DATE September 1, 2001.