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Senator Akaka bill stops check holding for payday loans

Community Reinvestment Association of NC
Consumer Action
Consumer Federation of America
Consumers Union
National Community Reinvestment Coalition
National Consumer Law Center
U.S. Public Interest Research Group

October 6, 2005
The Honorable Daniel K. Akaka
United States Senate
Washington, DC 20510
Dear Senator Akaka:
Consumer Federation of America, Community Reinvestment Association of NC, Consumer Action, Consumers Union, National Community Reinvestment Coalition, National Consumer Law Center and U.S. PIRG applaud you for sponsoring legislation to prohibit lending based on checks or debits drawn on federally insured depository institutions. You have recognized that it is an unsafe banking practice for consumers to be enticed by payday lenders to write checks or authorize debits when there is no money on deposit to cover these cash advances. We are also pleased that your bill would prohibit banks from partnering with payday lenders, a tactic used by storefront lenders to evade state small loan and usury laws.
The “Predatory Payday Loan Prohibition Act of 2005” prohibits the relatively new practice of holding a check as security for a loan. Using the check as security for the payment of a payday loan is the key to the coercive collection tactics used by the lenders. As the lender holds the check, at the end of the short term loan, the consumer is generally forced to choose among three untenable options: 1) allowing the check to be debited from their bank account where it will deplete money needed for food and other living necessities, 2) allowing the check to bounce, exposing the borrower to coercive collection tactics when lenders threaten civil or civil or criminal liability for unpaid checks, and from the risk of losing their bank account or check-writing privileges, or 3) renewing the loan at the original high cost. Loans based on personal checks drawn on the borrower’s bank account that will be deposited to repay the loan on the next payday is the modern version of lending secured by wage assignments, a credit practice long recognized as inherently unfair which violates FTC rules.
Your legislation also stops payday lenders from partnering with federally insured depository institutions to evade state usury or small loan rate caps. A few federally insured state chartered banks persist in “renting” their charters to payday lenders, a practice curtailed by most federal bank regulators, to make loans in states that enforce their usury or small loan laws.
Although payday lender-bank charter renting has been curtailed by regulatory action, only legislation will create a clear prohibition to stop this practice that undermines state small loan regulation.
Jean Ann Fox
Director of Consumer Protection
Consumer Federation of America
Peter Skillern
Executive Director
Community Reinvestment Association of NC
Linda Sherry
Director, National Priorities
Consumer Action
Susanna Montezemolo
Policy Analyst
Consumers Union
Monica Gonzales
Vice President of Legislation and Regulatory Affairs
National Community Reinvestment Coalition
Margot Saunders
Of Counsel
National Consumer Law Center
Ed Mierzwinski
Consumer Program Director
U.S. Public Interest Research Group (U.S. PIRG)