June 24, 2008
Chairman Barney Frank House Financial Services Committee 2129 Rayburn HOB Washington, DC 20515 Ranking Member Spencer Bachus House Financial Services 2129 Rayburn HOB Washington, DC 20515
Chairwoman Carolyn B. Maloney
Financial Institutions and Consumer Credit Subcommittee 2331 Rayburn HOB Washington, DC 20515 Ranking Member Judy Biggert Financial Institutions and Consumer Credit Subcommittee 1034 Longworth HOB Washington, DC 20515 Chairman Paul E. Kanjorski Capital Markets, Insurance, and Government-Sponsored Enterprises Subcommittee 2188 Rayburn HOB Washington, DC 20515 Ranking Member Deborah Pryce Capital Markets, Insurance, and Government-Sponsored Enterprises Subcommittee 320 Cannon HOB Washington, DC 20515 The Honorable Dennis Moore 1727 Longworth HOB Washington, DC 20515
Re: Concerns about HR 6312, the Credit Union, Bank and Thrift, Regulatory Relief Act of 2008 Dear Chairman Frank, Ranking Member Bachus, Chairman Maloney, Ranking Member Biggert, Chairman Kanjorski, Ranking Member Pryce, and Representative Moore: We appreciate your efforts to increase underserved communities’ access to affordable loans. Additionally, we would like to commend your efforts to improve the credit union payday alternative provision of HR 6312, the Credit Union, Bank and Thrift, Regulatory Relief Act of 2008, from the version in the original legislation. The current bill ensures that loans to non-members will be subject to the same interest rate cap as loans to members. The current bill also removes the provision from Section
107(a)(12)(B) of the Federal Credit Union Act, which authorizes services “for a fee,” to avoid arguments that the “for a fee” phrase authorizes fees above the interest rate cap. These are significant improvements over the original provision in HR 5519. However, we are writing to express continuing concerns about the bill, which we understand is on the suspension calendar this week. The provision permits federal credit unions to make short-term loans to non-members who are within their field of membership and expands their field of membership to encompass areas underserved by banking. Despite the lateness of the hour, we strongly urge you to do everything you can to ensure that this legislation is as strong and protective as possible. We would like to continue to work with you as the legislation makes its way through the legislative process to ensure that our concerns are addressed so that the much needed expansion of banking services to areas that are currently underserved by financial institutions does not mean an expansion of abusive or exploitative practices. Specifically, we are concerned that the provision could be misinterpreted to permit federal credit unions, with their preemptive powers, to reintroduce high-cost payday loans into states that have worked hard to reform their laws, and could undo the victory over the rent-a-bank abuses of the past. First, the Act, as amended by this bill, could still be misinterpreted to permit credit unions to offer the same high cost loans as payday loans that put families in a debt trap they cannot escape. Federal credit unions are subject to an 18% interest rate cap, which is “inclusive of finance charges.” NCUA generally uses the Truth In Lending Act/Reg. Z definition of “finance charges.” That definition, however, has exemptions that some lenders have tried to exploit to understate the cost of their loans. This loophole has already led one federal credit union to create a loan with a purported interest rate of 18%, but a “participation fee” of $10 per $100 borrowed, for a true annual percentage rate of 138%.1 The limitations of Reg. Z were most apparent when payday lender Advance America created a product in Pennsylvania with an ostensible 6% interest rate, but a $150/month participation fee for a true APR of 368%. Fortunately, the Pennsylvania courts ruled that the product violated state law, but there has been no ruling under federal law as to the permissibility of such fees.2 Subprime credit card companies also attempt to avoid stating a true interest rate by imposing junk fees like “acceptance” and “account set-up” fees. We believe that such manipulations violate TILA and, even apart from TILA, would be an evasion and violation of the interest cap in the Federal Credit Union Act. Nevertheless, the fact that some lenders believe otherwise indicates the importance of clarifying the provision to ensure that there is no argument. This is especially critical
1
See Business Wire, Family First Credit Union to Help Members Avoid Payday Loan Pitfalls with the Launch of Instacash, May, 5, 2008, available at http://findarticles.com/p/articles/mi_m0EIN/is_2008_May_5/ai_n25380919. 2 See Pennsylvania Dept. of Banking v. NCAS of Delaware, LLC, --- A.2d ----, 2008 WL 2207786 (Pa May 29, 2008).
before endorsing the expansion of payday alternatives to the underserved areas that use payday loans and to states that have worked hard to restrict payday lending. The fear that some federal credit unions might offer high cost payday loans is not idle speculation. In fact, several federal credit unions have partnered with CU on Payday, which makes loans from 114% up to 876% APR.3 Another federal credit union has bought a chain of check cashing stores and announced that it is looking at making payday loans – somewhat cheaper, probably, than existing payday loans, but still likely in the triple digits.4 The provision's potential for a high cost loophole is especially problematic in light of the fact that federal credit unions enjoy federal preemption and could make payday loans in states that have determined to restrict them. That is, a payday “alternative” could be much more expensive than the alternatives allowed under state law. Some federal credit unions might use the authority to make high-cost loans that are little different from traditional payday loans. Payday lending has had a devastating impact on underserved communities and families throughout our country and it would be detrimental to have credit unions offer comparable products. If the provision needs to be considered as part of the larger bill, we would ask you to modify the legislation to ensure that it is not misinterpreted by adding: “Any fees that are not finance charges may not be used to evade the interest rate ceiling and the total sum of such fees may not exceed the total amount of finance charges assessed for such loan." This would allow nominal applications fees that are permitted by TILA, which are intended merely to cover costs, but would not permit non-finance charge fees to be mislabeled and misused to avoid the requirements of the FCUA. The provision should also be clarified to ensure that payday loan “alternatives” cannot be more expensive than the loans permitted under state law. Our second concern about the provision is the requirement that loans be paid back within 90 days. Instead, the loans should carry a minimum, not a maximum, 90 day repayment period. The short repayment period of payday loans is what makes them a stealthy form of high cost credit and leads to rollovers and escalating costs. Lenders should be encouraged to give borrowers more time to pay back loans, not less, since it is extremely difficult for cash-strapped families to pay back loans in such a short time frame. There is no reason to prohibit a credit union that wants to provide reasonable terms to nonmembers by providing sufficient time to repay the loan from doing so. This problem is
3
See CUonPayday.com, http://www.cuponpayday.com (last visited June 23, 2008).
4
See American Banker, California CU: Check Casher Buy Means Better Prices, August 24, 2007, available at http://www.americanbanker.com/article.html?id=20070823AV4BYZ4I&queryid=330896761&hitnum=1.
of course compounded if large fees are added to the loan and not counted towards the finance charge, and then multiplied every two to four weeks when the loan is renewed. Thank you again for your time and consideration and for your efforts to extend affordable, non-exploitive banking services to areas in dire need of sensible financial institutions. We look forward to working with you to ensure that our mutual goal – to bring low cost alternatives to payday loans to those communities – is achieved. Thank you for your time and consideration. Sincerely, ACORN Center For Responsible Lending Consumer Action National Association for the Advancement of Colored People (NAACP) National Association of Consumer Advocates National Consumer Law Center (on behalf of its low-income clients) U.S. PIRG