CUNA Comment Letter

Proposed Revisions to the Regulation Z Commentary Regarding Payday Loans

January 10, 2000

Ms. Jennifer J. Johnson
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue, NW
Washington, DC 20551

Re: Docket No. R-1050, Proposed Revisions to the Regulation Z Commentary Regarding Payday Loans

Dear Ms. Johnson:

The Credit Union National Association (CUNA) appreciates the opportunity to comment on the proposed revisions to the official staff commentary to Regulation Z, which implements the Truth in Lending Act (TILA). The proposed revisions, which appeared in the Federal Register on November 5, 1999, would clarify that "payday loans" constitute credit and would be covered under TILA. CUNA represents more than 90 percent of our nation’s 11,000 state and federal credit unions.

The revised staff commentary would define a "payday loan" 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.

TILA currently defines credit as the right to defer the payment of debt or the right to incur debt and defer its payments. The revised staff commentary would include payday loans as credit because there is an agreement to defer cashing the check or debiting the consumer’s account. Creditors who regularly extend payday loans and impose a finance charge or fee would then need to provide the required TILA disclosures to the consumer.

CUNA supports the revisions to clarify that payday loans constitute credit and would be covered under TILA. These revisions will complement the opinion of many courts and state officials that payday loans are considered credit. The required disclosures will increase consumer awareness and hopefully will encourage consumers to compare the costs of funds among various types of lenders. With information from the disclosures, we believe many consumers will realize that credit unions provide the best solutions to their short-term lending needs. Many credit unions offer short term, low balance loan products that offer similar convenience to payday loans. The interest rates on these loans provided by credit unions are only a fraction of those imposed by payday lenders. Credit unions also provide members with the education they need in order to resolve the financial difficulties that resulted in the perceived need for a payday loan in the first place.

In addition to charging extremely high interest rates, many payday lenders offer consumers the option to defer repayment beyond the initial loan period with the payment of an additional finance charge. Unfortunately, the result is that the debt burden continuously increases over time, creating a vicious cycle that prevents consumers from resolving their financial difficulties.

The proposed revisions to the staff commentary will complement the ongoing efforts by CUNA to inform consumers about the abusive practices of payday lenders and other types of predatory lenders. The CUNA Board of Directors has recently made it a priority to support efforts to end these abusive practices and to educate consumers about the alternatives that are offered by credit unions. CUNA has been specifically following payday lending issues at the state level for quite some time and has supported the efforts of many states to require payday lenders to comply with the disclosure requirements under TILA.

Thank you for the opportunity to comment on the proposed revisions to the official staff commentary to Regulation Z. If you or other Board staff have questions about our comments, please give me a call at (202) 218-7795.


Jeffrey Bloch
Assistant General Counsel