ADOPTED NEW §1.605 

The Finance Commission of Texas (the commission) adopts new 7 TAC §1.605 concerning the authority to engage in deferred presentment transactions. The new rule is adopted with nonsubstantive changes to the proposed text as published in the May 12, 2000, issue of the Texas Register (25 TexReg 4259).

The commission received 14 comments to the proposed rule. Five comments were received from citizens of San Antonio (Michael Hymel; Mario Cisneros, esq.; Jean Hooge; Nellie Robinson; and Eva Herbery). The citizen comments expressed concern about the general practice and authorization of "payday loans". Other than a general objection to the concept of "payday loans" the comments offered no other specific suggestions or criticisms of the rule. The commission understands the potential abuses that may accompany payday loans and the commission is adopting the rule to minimize those abuses. The rule does not authorize a payday loan transaction outside the context of Subchapter F, Chapter 342 and is designed to pointedly address payday loans within the parameters of Subchapter F. The commission agrees with the commenters’ general concern of potential abuses, but disagrees that the loan must be declared illegal within the context of the current credit statutes. Comments were also received offering specific suggestions on the rule from Conrad Werkenthin, Clark, Thomas & Winters, Austin; Paul Purtha, Humphreys & Peterson, Garland; Consumers Union and Consumer Federation of America; Carl Beasely, Huntsville; and Gary Kley, Livingston. Four other comments expressing dissatisfaction that the maximum allowable rate was not high enough to compete with out of state banks offering payday loans or that the minimum charge could not be earned frequently enough such that it limits this product’s viability were received from Christopher Yonavich, Royse City; Larry Nuckols, San Antonio; Buz Waitz, San Antonio; and Martin D. Huggins, Austin. One of these comments states "the risk associated with a payday loan under these proposed rules is just greater than the reward of the rate you can charge." In response to the general comment that the rate that may be charged on a payday loan is not adequate, the commission declines to amend the proposed rule. The commission is bound to follow the credit statutes as enacted by the Texas Legislature. The commission is merely adopting rules to recognize a payday loan transaction within the context of the existing statute. The commission does not have the authority to increase the rate that may be charged on a payday loan.

Typically in a payday loan, a cash advance is made to a consumer in exchange for the consumer’s personal check, or the consumer’s authorization to debit the consumer’s deposit account electronically. In either case the consumer pays a fee in connection with the advance. Both parties understand that the amount advanced is not, or maynot be, available from the consumer’s deposit account at the time of the exchange. The parties agree, therefore, that the consumer’s check will not be cashed or deposited for collection until a designated future date. On that date, the consumer may have the option of repaying the obligation or further deferring repayment of the advance. The consumer may repay the obligation in various ways, for example, by providing cash or allowing the obligee to deposit the consumer’s check or electronically debit the consumer’s deposit account. The obligation for repayment classifies these transactions as loans within the statutory definition of loan [Texas Finance Code §301.002(10)]. The charge associated with the advance is interest or compensation for the use, forbearance, or detention of money [Texas Finance Code §301.002(4)]. These types of transactions clearly fall within the purview of Title 4 of the Finance Code. Furthermore, the maximum rate limitations for a loan of this type would be subject to Chapter 342.

This rule prescribes the standards of conduct that will be used to regulate and enforce these transactions within the framework of Chapter 342. Section 1.605 establishes the ability for a lender licensed under Chapter 342 to take a check to secure the payment of a loan. The practice of payday loans or deferred presentment transactions has rapidly spread across the United States. This rule recognizes and authorizes this type of loan within the Texas statutory usury framework.

Subsections (a) and (b) of the rule establish the definition and application of a payday loan or deferred presentment transaction. These subsections are necessary to appropriately define the types of transactions that may fall within the rule’s scope. One commenter suggested that the definition be expanded to apply to a transaction where the exchange would be "in part or in whole" for the check and the amount of the advance. The commenter believes that this clarification will prevent the "exotic disguises" of what is otherwise a payday loan. The definition in this section was drafted to correspond to a similar definition in the Staff Commentary to Regulation Z (12 C.F.R. Part 226). While the commission does not disagree with the comment, the commission believes that it is more important to retain the definition as proposed so that it is consistent with the definition in the Regulation Z commentary. 

Subsection (c) clarifies the maximum charge that may be assessed on this type of loan. One commenter suggested that it would clarify the rule to reference all the provisions of Subchapter F when referring to the maximum amount that may be charged on a payday loan. In particular the commenter believes that it would clear up confusion related to subsection (f). The commission agrees with this comment to reference these sections and amends the rule accordingly. 

Subsection (d) establishes a minimum term of 7 days of a loan of this type. One commenter objects to the minimum term of 7 days. This commenter urges a payday loan term of at least 14 days or the borrower’s next pay period. The commenter believes that a seven day term for a payday loanis per se unconscionable. The commenter acknowledges that this version of the proposed rules ameliorates the problem to some degree and supports those changes. The commission disagrees with this comment. The commission believes that the modifications made in this version of the rule place a borrower in an equivalent position in regards to whether the borrower gets a 7 day loan; a 14 day loan or a 21 day loan. The incremental charge incurred by the borrower in these loans only relates to the daily finance charge and is proportionately the same. Furthermore, the Texas Finance Code §342.258 authorizes the commissioner to establish repayment schedules on a weekly basis. This subsection conforms the rule with the statutory authorization. 

Subsection (e) prescribes the procedures for these types of loans. The subsection addresses the disclosures that must be given in addition to providing the measures for rebating the unearned charges and the time limitation on presenting a check for payment. 

Disclosures are necessary to adequately inform the borrower of the requirements and cost of this transaction. One commenter suggests requiring an additional disclosure that reads 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 for nearest nonprofit consumer credit counseling agency]." While the commission certainly supports the activities of nonprofit consumer credit counseling agencies, the commission believes that it would be inappropriate to require this disclosure at this time. The Office of Consumer Credit Commissioner provides consumer education material for display in each regulated lender’s office. This material includes information about nonprofit consumer credit counseling agencies. The commission declines to adopt the additional disclosure. 

The time restriction of 31 days for presenting checks to a bank for payment is necessary to prevent checks from becoming stale, in addition, to ensure that the borrower is adequately aware of the outstanding nature of the check. A primary intended objective of regulating and enforcing these and other consumer loan transactions is to ensure that a borrower fully understands the terms and conditions of the obligation. 

Subsection (f) provides interpretation of Texas Finance Code <*342.501> and clarifies that multiple and duplicate loans are limited. Subchapter F does not contemplate that a lender may have two loans to the same borrower within the same month that each have initial terms of less than one month. Potentially this situation could be construed as a violation of Sec. 342.501, as this section prohibits more than one obligation under Subchapter F to the same borrower that has the effect of exacting a greater interest charge than would otherwise be authorized under other sections of the chapter. Subsection (f) is intended to clarify how the agency will enforce the provisions relating to obligations on more than one loan contract and how the agency will enforce the maximum rate provision relative to multiple loanswithin the same month to the same borrower or multiple rollovers. Texas Finance Code <*>341.002 specifies that a month is the period from a date in a month to the corresponding date in the succeeding month. Two commenters specifically object to the application of this subsection that recognizes a borrower may have multiple loans within a month, but that earnings from acquisition charges are limited to a maximum of $10 a month. The commenters believe that under section 342.253 they are entitled to earn an acquisition charge each time a loan is renewed. The enactment of Subchapter F contemplated loans made on a monthly basis. The rationale for the assessment of an acquisition charge relates to the work required to initially originate a loan. A routine renewal of a payday loan does not require the same degree of work nor does it merit the same degree of charge. The commenters argue that section 342.253 entitles them to multiple acquisition charges within a single month. The commission believes that this interpretation could led to an absurd result and thus, requires the adoption of this rule. Assuming no term limitations, the commenters’ argument would permit earnings of up to 31 acquisition charges on a payday loan in a single month if the payday loan were made for one day and renewed each day of the month. This would result in finance charges of $314 on that $100 loan, an annual percentage cost of approximately 3700%. Even using the minimum loan term set forth in these rules, four consecutive seven day renewals would permit charges of $43.73 on a $100 loan in a single month resulting in an APR of approximately 570% for the entire month. The commission believes that the statute does not support this interpretation nor was it the intent of the Legislature in enacting Subchapter F to authorize the earning of multiple acquisition charges within a single month. The commission does not believe that it is appropriate to promulgate a rule that supports this theory. By contrast, the rule permits the acquisition charge for the initial term in the month with continuing charges for additional days. A $100 payday loan under the rule could have an acquisition charge of $10 and a daily charge of 13.72 cents for each day the loan is outstanding. A comparable annual percentage for the same 28 day period would be approximately 190%. The commission declines to modify the rule as the commission believes that the rule appropriately applies the statutory rates to the payday loan transaction. The rule is modified with nonsubstantive clerical type changes. Additionally, subsection (f) maintains a standard that the lender make a good faith effort to evaluate the borrower’s ability to repay consistent with the requirement established in 7 TAC §1.11. The agency specifically solicited comments on the use of the word "civil" in (f)(2). The agency received four comments on the use of the word "civil" in the rule. Three commenters urge the removal of the word "civil" in the rule. These commenters state that criminal prosecution is warranted especially in certain situations, such as when a consumer deliberately stops payment on a check or closes an account in an attempt to avoid payment on a payday loan. One commenter argues strongly that the word "civil" should be retained in the rule. The commenter points out that the essential element in prosecutionof hot check charges in Texas is the element of intent. The person writing the check must intend to defraud the payee. In a payday loan transaction, the element of intent is absent; the payee accepts the check knowing that the funds were unavailable and the check instead represents a promise to discharge a present obligation on a future date. The commission believes that the transaction represents a promise to discharge a present obligation on a future date and thus defines the character of a payday loan as a credit relationship. Whether other criminal offenses may be present in a payday loan transaction is a fact question that is best presented to a court of competent jurisdiction. The commission makes a nonsubstantive change to the rule that retains the word civil within the rule, but clarifies the rule regarding criminal prosecution. 

Several of the provisions in the proposed rules are consistent with industry practices and procedures in other states where the loan product is offered in a regulated manner. These rules conform this type of transaction to the Texas statutes and specifies the conditions that will be applied to these transactions in order to enforce the usury statutes. 

The new rule is adopted under Texas Finance Code, §11.304, which authorizes the Finance Commission to adopt rules to enforce Title 4 of the Texas Finance Code. Additionally, Texas Finance Code §342.551 authorizes the Finance Commission to adopt rules for the enforcement of the consumer loan chapter. The rule is adopted to harmonize this type of transaction with the general objectives and purposes of the consumer loan statute, that being providing protections to consumers from abuses and egregious practices and providing the conditions and maximum limits for the amounts that may be charged on a consumer loan. Furthermore, Texas Finance Code §14.108 grants the consumer credit commissioner and the Finance Commission the authority to interpret the provisions of Title 4, Subtitle B, in which Chapter 342 is located.

§1.605. Payday Loans; Deferred Presentment Transactions.

3. Maximum charge. A licensee may charge an amount that does not exceed the rates authorized in Texas Finance Code, §342.251 - §342.258. The chart in Exhibit 1 provides examples of the maximum authorized rates for loans made under Texas Finance Code Subchapter F. Texas Finance Code §342.254 which prohibits other charges applies to this section. 

4. Minimum term. A licensee may engage in a payday loan or deferred presentment transaction with a term of not less than 7 days. 

Certification: This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be within the agency’s authority. 

Issued in Austin, Texas, on June 16, 2000 

Sealy Hutchings
General Counsel Office of Consumer Credit Commissioner