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REGULATING THE BUSINESS OF MAKING SMALL LOANS
IN THE DISTRICT OF COLUMBIA
MARCH 4 (calendar day, MARCH 11), 1935.-Ordered to be printed
Mr. KING, from the Committee on the District of Columbia,
submitted the following
[To accompany S. 1162)
The Committee on the District of Columbia, to whom was referred the bill (S. 1162) to regulate the business of making small loans in the District of Columbia and to amend an act to regulate the business of loaning money, etc., approved February 4, 1913, having considered the same, report favorably thereon with the recommendation that the bill do pass with the following amendments:
Amend section 1, paragraph (a), page 2, line 2, by inserting after the word “bankers," the words credit unions established under the Act approved June 23, 1932 (47 Stat. 326, c. 272, sec. 1) and under the Act approved June 26, 1934 (48 Stat. 1216, c. 750),".
Amend section 1, paragraph (a), page 2, line 7, by striking the “.” after the word “loan" and inserting a “;" and the following: “Provided, That any of the above-excepted national banks, licensed bankers, trust companies, and savings banks may operate under the provisions of this Act upon securing a license so to do."
Renumber section 12, page 10, by the following amendments: Amend page 10, line 5, by inserting after “SEC. 12” the following, "(A)”.
Amend page 10, line 23, by inserting before the word “Fees” the following, "(B)”.
Amend page 12, line 22, by inserting at the beginning thereof the following, (C)”.
Amend section 12, paragraph (c), page 12, line 8, by striking all matter in lines 8 to 21, inclusive.
Amend section 12, paragraph (c), page 12, line 23, by striking the matter included in the parentheses. Further amend the said section and paragraph at page 13, line 11, by striking the words "amounts greater than the installments” and inserting in lieu thereof "in
advance of the date" and inserting in line 12 after the word "loan" the following: “one or more installments”.
Amend section 13, page 14, by striking the section and inserting the following: "The provisions and restrictions of this Act shall be applicable to loans not in excess of $300 and whenever a licensee under this Act shall make any loan in excess of $300, interest and charges on the said excess shall be governed by other law."
Amend section 27, page 20, line 16, by striking the said section and inserting in lieu thereof the following: “This Act shall become effective 90 days after the date of its enactment and shall not affect loans made before the passage of this Act which have not matured before the effective date of this Act."
PROVISIONS OF THE ACT
The act defines the business of making small loans and specifies the persons who may engage in such business under its provisions, as amended. National banks, licensed bankers, trust companies, and savings banks may, if they choose, engage in the business of making small loans, but if they so do they must secure a license in accordance with the provisions of this act and submit to regulation under the act that portion of their business which relates to small loans at interest rates, including fees and charges in excess of 6 percent per annum. Federal and District of Columbia credit unions, having present authority to make small loans under separate regulations of their own, are excluded from the act. The prohibition against pawnbrokers in the District of Columbia is continued.
The act requires that application be made for a license to the Superintendent of Insurance of the District of Columbia and sets forth the specific information and qualifications which the Superintendent must consider prior to approval of the application.
An annual license fee of $200 to cover the costs of regulation, with provision for pro ration for periods less than a year down to not less than $50, is included in the act. The Commissioners of the District of Columbia are given jurisdiction to modify the license fee in accordance with the cost of supervision, inspection, and regulation.
The act further requires a bond which is accessible to persons injured by fraud or other action in violation of the act and provides for convenient service of process upon the Superintendent of Insurance in the name of the licensee. Specific provision is made to advise borrowers of their rights under the act and to make certain that they are fully informed as to the maximum obligations which may be legally charged. In addition there is adequate provision for the Superintendent of Insurance to inspect the transactions and records of licensees and for the revocation of licenses of those who operate in violation of the law.
The act provides penalties for persons doing business covered by its provisions without securing a license and for licensees who depart from the restrictions hereby imposed.
HISTORY OF LEGISLATION
On February 4, 1913 (37 Stat. 660, c. 26), there was enacted a bill to regulate the loaning of money in the District of Columbia. Under this hill the rate of interest upon any loan made by a licensed loan
company was limited to 1 percent per month on the actual annount of the loan to include all fees, expenses, and demands for services of every character. Only one person was ever licensed under this act, and for many years no one has been so licensed.
Since 1930 there has been pending before the Senate a series of small-loans laws, many of which were of the so-called “uniform law type” specifying a rate of interest of 344 percent per month on unpaid balances of loans up to $300. Although this type of legislation received very strong support from organizations said to be philanthropic in nature, it was strongly opposed in the District of Columbia as authorizing unconscionably large rates of interest.
At the hearings conducted on previous bills and during consideration of the present bill, a great deal of information was secured as to operations of loan sharks in the District of Columbia at the present tíme. Numerous instances were found where rates, including charges, as high as 30 percent of the face amount of the loan were being demanded and received. It has been found difficult to prosecute in such cases, as the stated interest rate is given as 6 percent and the dealer purports to act as the procurer of the loan only.
As a result of years of administrative interpretation of the Loan Shark Act of 1913, the application of that act to certain conditions is not clear. The committee found a general agreement of all civic organizations, social agencies, and officials that the business of making small loans should be the subject of regulation. Numerous conferences were held for the purpose of so fixing the charges and conditions that loans would be still available to the persons in need but at the lowest possible rates consistent with the expense of conducting the business.
The present act describes as interest not only the simple interest stated in the note but anything of value required to be paid as compensation for the loan, including charges, fees, and expenses of all natures, and specifies that interest so determined shall not exceed 2 percent per month on the monthly unpaid principal balance of the loan. The interest may not be compounded and neither the interest nor the fees can be deducted from the principal of the loan.
The provisions governing fees themselves divide loans into three classes and provide that loans of $35 or less for a period of 30 days or less in instances where no collateral is required, fees not to exceed $1 to be charged for a credit report if such a report is actually secured or made and not to exceed 50 cents for interest for all other charges in addition to the $1 for the credit report is permitted. It is in this class of loans for small amounts for short periods that the greatest abuses are prevalent at present, known instances of charges as high as $10 and $15 being made even on collaterally secured loans.
Section 12 of the act specifies the fees which may be charged for other types of loans up to $300. Section 13 has been modified so as to permit the licenses to make loans greater than $300 but so as to restrict the charges which may be made on amounts of above $300 under the statutes governing usury as there is no occasion to permit the higher rates necessitated by the pro ration of charges on the smaller loans.
NECESSITY FOR THE LEGISLATION
It was clearly shown to the committee that many thousands of the residents of the District of Columbia are in such financial condition that they must resort to money lenders to meet minor financial emergencies.
Great numbers of these unfortunate persons are now compelled to borrow money from lenders in the District of Columbia at rates vastly in excess of those prescribed in the bill. Many others use loan companies in nearby Maryland and Virginia operating under statutes which permit the collection of 34 percent per month. Although much testimony was introduced under the auspices of the Russell Sage Foundation to the effect that small loan companies cannot conduct their operations at less than 374 percent per month, the committee is of the definite opinion that with the present trend in interest rates responsible companies can conduct a small-loans business in the District of Columbia at the rates herein prescribed. This opinion is confirmed by a number of responsible loan operators and by the investigations of the officials of the District of Columbia.
This legislation has been carefully considered by the Board of Commissioners of the District of Columbia, the Corporation Counsel, the Peoples' Counsel, and various citizens' associations of the District of Columbia. It has received the unanimous approval of the above persons and organizations, as well as the unanimous approval of the District Committee. The Commissioners of the District of Columbia submitted the draft of the bill, and urge its passage.