CUNA Regulatory Comment Call
November 10, 1999
Fed Proposal to Include "Payday Loans" Under Truth in Lending
NOT A MAJOR RULE
EXECUTIVE SUMMARY
- The Federal Reserve Board (Fed) is requesting comments on a proposed rule to revise Regulation Z, the Truth in Lending Act (TILA).
- These revisions would clarify that "payday loans" constitute credit and would be covered under TILA.
- "Payday Loans" would be defined as a short term cash advance made to a consumer in exchange for a personal check in the amount of the advance plus a fee.
Comments on the proposal are due by January 10, 2000. Please submit your comments to CUNA by January 5, 2000. Please feel free to fax your responses to CUNA at 202-371-8240; e-mail them to Associate General Counsel Mary Dunn or to Assistant General Counsel Jeffrey Bloch; or mail them to Mary or Jeff in c/o CUNA's Regulatory Advocacy Department, 805 15th Street, NW, Suite 300, Washington, DC 20005. You may also contact us if you would like a copy of the proposed rule or you may access it on the Internet.
BACKGROUND
TILA is intended to promote the informed use of consumer credit by providing for disclosures about its terms and cost. TILA requires creditors to disclose the cost of credit as a dollar amount and as an annual percentage rate in a uniform manner. This uniformity is intended to assist consumers in comparison shopping for credit. TILA also requires additional disclosures for loans secured by consumers' homes and permits consumers to rescind certain transactions that involve their principal home. Regulation Z implements TILA, which contains official staff commentary that interprets the regulation and provides guidance in applying the regulation to specific transactions.
BRIEF DESCRIPTION OF THE PROPOSAL
The proposed rule would clarify that "payday loans" constitute credit and would be covered under TILA. This clarification would be incorporated in the official staff commentary. "Payday Loans" would be defined as a short term cash advance made to a consumer in exchange for a personal check in the amount of the advance plus a fee. Instead of a check, consumers could provide authorization to debit their checking account for the amount of the advance and the fee. In either situation, the parties agree that the consumer's check will not be cashed, or the account debited, until a designated future date.
"Payday loans" are also known as "cash advance loans," "check advance loans," and "post-dated check loans." These transactions usually occur with the knowledge by both parties that the amount advanced is not available from the consumer's checking account at the time of the transaction. These transactions usually give the consumer the option to defer payment beyond the initial period by paying an additional fee.
TILA currently defines credit as the right to defer the payment of debt or the right to incur debt and defer its payments. The proposal would amend the official staff commentary to include "payday loans" as credit because there is an agreement to defer cashing the check or debiting the consumer's account. Creditors that regularly extend "payday loans" and impose a finance charge or fee must therefore provide the required TILA disclosures to the consumer.
QUESTIONS TO CONSIDER REGARDING THE FED'S REGULATION Z PROPOSAL
- Does your credit union offer "payday loans" or have arrangements to provide such services to your members? If so, are you currently providing the TILA and Regulation Z disclosures?
- Do you support the proposed rule that would clarify that "payday loans" are subject to TILA and Regulation Z? Do you believe that the required disclosures will affect consumers' decision to accept such loans? Do you believe that these disclosures will encourage consumers to compare terms among various lenders?
- Imposing even a reasonable fee to recoup costs on a "payday loan" will still likely yield an annual percentage rate that will appear excessive. Do you believe such information will be useful to consumers?
- Other comments?
Leagues and credit unions should feel free to fax their responses to CUNA at 202-371-8240; e-mail them to Jeffrey Bloch at jbloch@cuna.com or mail them to CUNA's Regulatory Advocacy Department, Suite 300, 805 15th Street, NW, Washington, DC 20005. Thank you!!
