The Small Loans Regulatory Board, pursuant to the authority of M.G.L, c. 140, § 100, as amended, and upon the Petition of the Massachusetts Consumer Finance Association, and after notice, held public hearings on eleven days commencing on March 10, 1980 and terminating on July 23, 1980, in the course of which it received evidence and exhibits and the conclusion of the formal hearing briefs were submitted by interested parties.
The Board has investigated the economic conditions and other factors relating to and affecting the business of making loans under M.G.L. c. 140, §§ 96 through 113, as amended, inclusive, and has ascertained the pertinent facts necessary to determine what maximum rates of charge for interest should be permitted on regulated loans of $3,000 or less.
The Board ascertains the following to be the pertinent facts:
26.01: The Business to be Regulated
As of December 31, 1979, the licensed lenders engaged in making loans of $3,000 or less held 172 licenses as opposed to 266 in 1975. The chains wrote 97% of the loans receivable and single office companies wrote the remaining 3%.
We find that the 1979 composite figures for all licensed lenders which have been compiled by the Division of Banks and Loan Agencies from Annual Reports filed by all licensed lenders is the latest statistical description of the industry.
On December 31, 1979, there were 144,395 regulated loans outstanding with a face value of $192,044,511.20 which includes unearned charges of $34,703,639.06. During the calendar year 1979, 107,835 loans were made amounting to $135,453,323.85 which is less unearned charges. This compares with figures for 1975 of 128,453 loans made for $150,621,276.99.
26.02: Earnings of Presently Regulated Business
Public Document No. 95 prepared by the Division of Banks and Loan Agencies as of December 31, 1979 discloses that earnings of the presently regulated business of making loans of $3,000 or less continues to decline. The trend has been noted previous to the Rate Order of 1976 and has continued. One or two large chains have shown small profits. We find that no companies engaged in the small loan business in Massachusetts are receiving sufficient earnings on their assets. We comment that no overall rate increase has been granted since 1960.
26.03: Expansion of the Business
Consumer lending both nationally and in Massachusetts has shown continued growth. Federal Reserve Bank reports disclose the trend nationally and reports of Massachusetts banks disclose the same trend locally. While consumer lending reports include other than regulated loans, we are convinced that adequate credit facilities for $3,000 and under loans are available to consumers. Increased use of credit cards, continued expansion of credit unions and other banking facilities and services coupled with the complete lack of consumer testimony to the contrary lead us to this conclusion.
Consumer lending reports gathered by the Division of Banks and Loan Agencies and published periodically in newspapers throughout the Commonwealth disclose that on $2,000 loans, unsecured, banks and credit unions have consistently offered them at rates substantially under the 18% rate while finance companies have consistently offered the same loans at or near the 18% limit. This leads us to conclude that consumer fiance companies are affected by competition from alternate lenders and will continue to lose their share of the market.
26.04: Statutory ;Standards
(1) Assets. The assets as shown in Exhibit A of P.D. 95 consist of net receivables, cash, real estate, furniture and fixtures, deferred charges and other assets plus a home office allocation, less compensating balances equaling $157,981,987. We believe for purposes of rate setting the asset basis of Professor Campen as set forth in Table 4 of Exhibit 36 of $157,079,000 is more realistic and we do adopt that basis.
(2) Fair and Reasonable Rate of Return. We have determined from testimony offered and considered that to induce efficiently managed capital to be invested a five to one debt to equity ratio should be encouraged and that an opportunity for a 13% return on equity should be provided. We have further determined that borrowed funds will cost 9.65% and that taxes will be 46% of net income. Operating expenses and bad debts were taken from P.D. 95.
26.05: Conclusions - Maximum Rate of Charge
An analysis of the model described above with the data supplied in P.D. 95 as of December 31, 1979 reveals sufficient income has not been earned by licensed lenders. A total gross revenue of $37,762,962 is needed. With deductions of other income, delinquency charges and credit insurance of $1,488,490 a total of $36,274,472 should be raised from a rate of charge and the administrative fees. We find that a maximum rate of return of 23% plus a $20 administrative fee could result in income of $36,448,988.
We reject the petitioner's request for step or graduated rates. We find the borrower can better understand one rate. We have determined that we have no authority to tie the rate to an index.
Having granted a substantial increase in maximum rate the Board is concerned with encouraging refinancing at the higher rate. Refinancing will not be allowed at the higher rate unless the borrowers are advised of alternatives available to them.
26.06: Rate Order
We hereby promulgate the following order:
(1) All persons subject, in whole or in part, to the provisions of M.G.L. c. 140, §§ 96 through 113, may charge, contract for, and receive the following maximum interest charges for loans not in excess of $3,000:
(a) 23% per annum of the unpaid balances of the amount financed calculated according to the actuarial method plus an administrative fee of $20 upon the granting of a loan. An administrative fee is not permitted to be assessed to a borrower more than once during any 12 month period.
(b) Outstanding loans contracted at the previous rate may be refinanced at higher rates permitted under this order only after the borrower is furnished with written notice of their legal right to have two separate loans and disclosing the additional finance charge incurred in consolidating the outstanding loan with a new loan. Receipt of this notice must be acknowledged in writing by the borrower.
(2) Such maximum interest charges shall not exceed 6% per annum after the termination of one year after maturity of the loan.
(3) Interest charges shall be computed on the actual unpaid principal balances for the actual time outstanding or may be pre-computed as authorized by this order. For the purpose of computation, whether at the maximum rate or less, a month shall be that period of time from any date in a month to the corresponding date in the next month and if there is no such corresponding date then to the last day of the said next month, and a day shall be considered 1/30 of a month when computation is made for a fraction of a month.
(4) When the loan contract requires repayment in substantially equal and consecutive monthly installments of principal and interest charges combined, the interest charges may be pre-computed at the agreed monthly rate, which rate shall not be in excess of that established by this Board and in effect at the time the loan is made, on scheduled monthly principal balances and added to the principal of the loan, and every payment may be applied to the combined total of principal and pre-computed interest charges until the contract is fully paid. The portion of the pre-computed interest charge applicable to any particular monthly installment period shall bear the same ratio to the total pre-computed interest charge as the balance scheduled to be outstanding during that monthly period bears to the sum of all monthly balances scheduled by the original contract of loan. Such pre-computed interest charge shall be subject to the following adjustments and such adjustments shall be deemed to be within the limitation on interest charges as established by this Board:
(a) The first installment date may be not more than one month and fifteen days after the date of the loan. If such date is more than one month after the date of the loan, the licensee may charge and collect an extension charge not exceeding 1/30 of the portion of the finance charge applicable to a first installment period of one month for each day that the first installment date is deferred beyond one month. Such extension charge may be collected at the time of payment of the first installment or at any time thereafter. If the first installment date is less than one month after the date of the loan, the licensee shall, on the date of the loan, credit against the finance charge an amount not less than 1/30 of the portion of the finance charge applicable to a first installment period of one month for each day the first installment date is less than one month.
(b) If the loan contract is prepaid in full by cash, a new loan, or refinancing of such loan before the final installment date, the borrower shall receive a refund or credit. Any such refund or credit shall represent at least as great a proportion of the total amount of the pre-computed interest as the sum of the scheduled periodic total of payments after the date of prepayment, as the date of prepayment is fixed below, bears to the sum of the scheduled periodic total of payments under the schedule of installments in the original contract. Such computation of refund or credit shall be made under the so-called sum of the digits method. If the prepayment is made other than on an installment due date it shall be deemed to have been made on the first installment due date if the prepayment is before that date, and in any other case it shall be deemed to have been made on the next preceding or next succeeding installment due date, whichever is nearer to the date of prepayment.
(c) In the event of a default of more than ten days in the payment in full of any scheduled installment, the licensee may charge and collect a default charge in an amount not in excess of 5% of each installment in default or $5.00, whichever is less. Said charge may not be collected more than once for the same default and may be collected at the time of such default or at any time thereafter. Such charge may be taken out of any payment received after a default occurs, provided, that if such deduction results in the default of a subsequent installment, no charge shall be made for such subsequent default.
(d) A licensee may, by agreement with the borrower, defer payment of all wholly unpaid installments one or more full months and may charge and collect a deferment charge which shall not exceed the portion of the finance charge applicable under the original contract of loan to the first month of the deferment period multiplied by the number of months in said period. The deferment period is the month or months in which no scheduled payment has been made or in which no payment is to be required by reason of the deferment. Such deferment charge may be collected at the time of deferment or at any time thereafter. No deferment charge shall be made on any installment for which a default charge has been made unless the default charge on such installment is refunded in full. Except as provided hereinafter a deferment agreement
1. shall be in writing and signed by the parties;
2. shall incorporate by reference the loan agreement to which the deferment agreement applies;
3. shall state the terms of the agreement;
4. may provide that the borrower shall pay the additional cost, if any, for insurance coverage provided in the deferment; and
5. shall clearly set forth the facts of any deferment charge, the amount deferred, the date to which or the time period for which payment is deferred, the amount of the charge for the deferment, and the amount for the additional cost of insurance, if any, resulting from the deferment. If the deferment agreement extends the due date of less than three installments, it need not be in writing, but it must have the specific authorization of the borrower. If a loan is prepaid in full during a deferment period, the borrower shall receive, in addition to the refund required under 209 CMR 26.06(4)(b) a refund of that portion of the deferment charge applicable to any unexpired months of the deferment period. In computing any required refund or credit, the portion of the finance charge applicable to each installment period following the deferment period and prior to the extended maturity shall remain the same as that applicable to such periods under the original contract of loan.
REGULATORY AUTHORITY
209 CMR 26.00: M.G.L. c. 140, §§ 96 through 113.
TO ESTABLISH THE FINANCIAL CONSUMERS' ASSOCIATION.
Be it enacted by the Senate and House of Representatives in General Court assembled, and by the authority of the same, as follows:
SECTION 1. The people of the Commonwealth of Massachusetts hereby find that financial consumers need an effective advocate to assure that public policies affecting the quality and price of financial services reflect their needs and interest, that financial consumers have the right to form a nonprofit corporation which will represent their interests before legislative, administrative and judicial bodies, and that financial consumers need a convenient manner of contributing to the funding of such an organization so that it can advocate forcefully and vigorously on their behalf concerning all matters of consumer financial policy affecting their health, welfare, and economic well-being. The corporation shall be called the Financial Consumer's Association.
Section 2. Definitions. As used in this chapter, unless the context otherwise requires: (a) The term "association" shall mean the Massachusetts Financial Consumer's Association (MFCA) established pursuant to this chapter. (b) The term "banking service" shall be construed broadly and shall include any banking or financial service performed by a regulated banking institution doing business in the Commonwealth of Massachusetts, and any activity closely related to or functionally similar to a banking or financial service. The term shall include, but not be limited to, each of the following: payment or transfer of funds, checking and savings accounts, credit cards, credit extension, credit reporting, securities activities, investment and management of funds, investment advice, and financial counseling. (c) The term "banking service provider" shall mean any corporation, unincorporated business, association, or government agency that provides a banking service. (d) The term "congressional district" or "district" shall mean the political subdivision used in the general United States election of representatives to the United States Congress. (e) The term "consumer" shall mean a natural person who uses a banking service primarily for personal, family, or household purposes. (f) The term "deposit account" shall mean: (i) a deposit as defined in subsection (1) of section three (3) of the Federal Deposit Insurance Act; (ii) a deposit, certificate, share or other such account authorized pursuant to section five (5) of the Home Owners Loan Act of 1933 or eligible for insurance under section four hundred three (403) of the National Housing Act; or (iii) a member account as defined in section one hundred one (101) of the Federal Credit Union Act or eligible for insurance under section two hundred one (201) of the Federal Credit Union Act. (g) The term "deposit account statement" shall include but not be limited to a statement that: (i) indicates the balance on a deposit account; (ii) involves an outstanding deposit account contract between a regulated banking institution doing business in this commonwealth and a natural person; and (iii) is mailed or otherwise delivered to such person. (h) The term "director" shall mean any member of the association duly elected or appointed to the board of directors of the Massachusetts Financial Consumers' Association. (i) The term "member" or "member of the association" shall mean any person who satisfies the requirements for membership in the association. (j) The term "notice insert" shall mean the materials drafted and printed by the Office of the Attorney General of Massachusetts, the Massachusetts Executive Office of Consumer Affairs, or another third party for the association and inserted into mailings by regulated banking institutions doing business in this commonwealth or their agents. (k) The term "periodic statement" means the periodic statement prescribed pursuant to the act of Congress entitled "Truth in Lending Act" and the regulations thereunder, as such act and regulations may from time to time be amended.
Section 3. Establishment and membership of the association. (a) There is hereby created a public purpose, democratically controlled, incorporated membership association of banking service consumers, to be known as the "Massachusetts Financial Consumers' Association." (b) The association shall be a nonprofit corporation and, to the extent consistent with the requirements of this chapter, have all the rights and powers generally accorded and be subject to all duties generally imposed upon nonprofit membership corporations by the laws of this commonwealth. (c) The membership of the association shall consist of all natural persons who are eighteen (18) years of age or older, residents of this commonwealth, and have contributed the required annual membership dues to the association. (d) The association shall not be deemed an agency or department of the government of the commonwealth.
Section 4. Duties and powers of the association. (a) The association shall have the following charter duties, and all actions by the association shall be directed toward these duties: (i) to inform, educate, advise, and mobilize consumers and others on banking matters; and (ii) to represent, protect and promote the interest of consumers in banking service matters as individual consumers and collectively in terms of local community needs and broad public interest; and (iii) to take affirmative measures to encourage membership by low- and moderate-income and minority consumers; to disseminate information and advice to such consumers, and to represent their interests in banking service matters; and (iv) to inform, insofar as possible, banking service consumers about the association, including the procedures for obtaining memberships in the association; and (v) to establish annual membership dues which shall be set at a level that provides sufficient funding for the association to effectively perform its powers and duties, and is affordable for as many consumers as is possible. (a) The association may establish a method whereby economically disadvantaged individuals may become members of the association without full payment of the annual dues. (b) In no event may payment of a member's annual dues be less than five dollars ($5.00). (c) Interim dues shall be levied at the amount of five dollars ($5.00) until such time as the interim board of directors or the board of directors sets a different amount. (b) The association shall be a nonprofit corporation and, to the extent consistent with the requirements of this chapter, have all the rights and powers generally accorded and be subject to all duties generally imposed upon nonprofit membership corporations by the laws of this commonwealth. (c) Within its general powers under chapter 180, the association shall have all the powers necessary or convenient for the effective representation and protection of the interests of consumers and to implement this chapter, including but not limited to the following powers in addition to all other powers granted by this chapter. (i) to initiate, to intervene as a party or otherwise participate on behalf of consumers in banking service matters in this commonwealth or elsewhere, before regulatory agencies, legislative bodies, and other public forums which the association reasonably determines may affect the interests of consumers; (ii) to sue on behalf of any member, group of members or all members for judicial relief, including damages, in any court of competent jurisdiction in regard to any banking service matter; (iii) to represent the interests of consumers in the resolution of complaints involving a banking service provider; (iv) to negotiate on behalf of consumers with banking service providers; (v) to represent the interests of associations, unincorporated businesses, and corporations in banking service matters before regulatory agencies, legislative bodies, and other public forums where such representation is in the interests of consumers; (vi) to solicit grants or other aid in order to support activities concerning the interests of banking service consumers, except that the association shall not accept gifts, loans or other aid from any banking service provider or from any director or shareholder, and the immediate family thereof, of any banking service provider; (vii) to conduct, support, and assist research, surveys, and investigations, planning activities, conferences, demonstration projects and public information activities concerning the interests of consumers in banking service matters. The association may accept grants, contributions and legislative appropriations for such activities. (d) Among the others delineated in this chapter, the association shall have the following duties to its members: (i) to conduct board meetings open to the public, except for executive sessions; (ii) to submit an annual financial report for the preceding year to the members; (iii) to submit an annual summary of activities for the preceding year to the members.
Section 5. Board of Directors. (a) The affairs of the association shall be managed by a board of directors which shall be elected by and from the members of the association. The board shall be comprised of two members elected from each congressional district in the commonwealth by a plurality of votes cast by members residing in that district. The election shall be conducted [by secret mail ballot] in accordance with a procedure established by the board of directors. (b) Members of the board of directors shall serve two year terms. Elections shall be held bienially. (c) Each member of the board shall have one (1) vote. (d) Each member of the association shall be entitled to cast one (1) vote for each open director position from the district of the member's residency. (e) while on the board, no director elected under this section may hold any public office, or be a candidate for any public office. No person who owns or controls, either singly or in combination with any immediate family member, the stocks or bonds of any banking services provider of a total value in excess of ten thousand dollars ($10,000) is eligible to serve as an elected director of the association. (f) To fill any vacancy occasioned by the failure of any person elected as a director to qualify, or in the event of death, removal, resignation or disqualification of any director, a successor shall be nominated from the same district. A majority of the remaining board members may select one of the nominees to serve until the next annual election. (g) Members of the board may be removed by petition of forty percent (40%) of the total number of members voting in the last election from the district from which that director was elected. (h) The board shall hire an executive director to oversee the day-to-day operations of the associations. (i) The board may establish and revise reasonable rates of reimbursement for expenses related to service on the board. Members of the board may not, however, receive compensation for their services. There shall be an independent overseer who will count the ballots in all association director elections.
Section 6. Interim board of directors. (a) There shall be twelve (12) initial directors. The Governor shall appoint six (6) initial directors, and the Attorney General shall appoint six (6) initial directors. (b) The twelve (12) interim directors shall be representative of each of the following categories of organizations: consumer, labor, civil rights, neighborhood, elderly, and organization representing lower-income persons, including legal service organizations. (c) Within eighteen (18) months of the appointment of the last interim director, the interim board of directors shall set a date for the first general election of directors and shall promptly notify every member. The date set for the election shall not be more than ninety (90) days after such notification. Provided, however, that the election shall not take place unless there are at least (100) residents of each district who are association members.
Section 7. Directors' candidacy and campaign. (a) No employee, officer, consultant, contractor, attorney, accountant or real estate agent of any banking service provider or any employee of such individual, or any member of the immediate family of any such individual, shall be eligible to serve as director of the association. (b) The interim board of directors shall, consistent with the requirements of this chapter, define and determine the requirements for eligibility for service on the board of directors. (c) No fewer than sixty (60) days, and no more than one hundred-twenty (120) days, prior to the election of directors, each candidate for the board of directors shall provide: (i) a disclosure of the candidate's financial interest, and (ii) the candidate's three (3) most recent tax returns. (d) Each candidate may spend, accept or use, or may allow anyone to spend, accept, or use on his or her behalf, campaign resources whose value equals an amount which is not more than the number of members in the candidate's district times one and one-half (1.5) times the cost of postage for a one-ounce first class mailing. (e) A candidate may not accept any contribution or campaign resources in the aggregate of more than one hundred dollars ($100.00) in any one (1) election from any individual, group or committee. (f) In order to become and remain eligible to serve on the board of directors, a candidate shall: (i) make available to the association any records, books and other information they may request regarding campaign resources, and (ii) cooperate fully with any audit and examination conducted by the association. (iii) Each member who is a candidate for election to the board of directors shall certify, under penalty of perjury, that the total value of campaign resources spent, accepted, or used by the candidate, combined with the total value of campaign resources spent, accepted, or used by any person or group authorized by or acting for the candidate, does not exceed the limits set forth in section 7(b)(ii) of this chapter. (iv) The board shall make available to its members the list of membership by district. (v) Upon receipt of a petition signed by five percent (5%) but not fewer than a total of twenty (20) members of the association from a district endorsing the candidacy of a particular association member for election to the board of directors, the board shall place the candidate's name on the ballot.
Section 8. Notice insert. (a) Once the association has been incorporated and so long as the association remains in existence, any banking service provider doing business in this commonwealth or its agent shall include a notice insert meeting the requirements of this section at least four (4) times annually in deposit account statements or periodic statements that it mails to addresses located within this commonwealth. (a) The notice insert shall consist of the following components: (i) a written statement which shall read: "The Massachusetts Financial Consumers' Association (MFCA) is a consumer membership organization established by the Massachusetts legislature to inform and represent consumers in banking, credit, and other financial service matters. MFCA provides consumers with information and advice on a range of banking and financial services, such as consumer loans, mortgage loans, credit cards, checking and savings accounts, banking service fees, and financial planning. MFCA is a watchdog organization that is non-governmental, democratically controlled, and membership-driven. Consumer members elect MFCA's board of directors, and the board of directors controls MFCA's activities. Although MFCA has been established by state law, as a consumer membership organization it is supported by membership dues, not public funds. Thus, MFCA depends on its membership base for funding to undertake its information and representation activities. Any resident of Massachusetts, eighteen (18) years of age or older, is entitled to become a member of MFCA by tendering the annual membership dues. The dues are currently $xx.xx [specify]. You may become a member simply by completing the attached application and mailing it with the membership to MFCA in the attached pre-addressed envelope." (ii) an application for association membership which requests the applicant's name and address and indicates the annual membership dues; and (iii) a pre-addressed business reply envelope for mailing the application and membership dues to the association. (c) The notice insert shall be subject to the following requirements and restrictions: (i) the statement, application and pre-addressed business reply envelope shall be presented to the customer as a single document, although the document may be separable into different parts by tearing along perforated lines; (ii) the Division of Banks shall notify each regulated financial institution doing business in this commonwealth of the association's annual membership dues; the annual membership dues shall be incorporated into the statement and application; (iii) the statement and application shall be printed in at least ten point type; (iv) the entire notice insert shall not weigh more than thirty-five one-hundredths of an ounce (0.35 ounce).
Section 9. Consumers not limited. Nothing in this chapter shall be construed to limit the right of any consumer or group or class of consumers to initiate, intervene in, or otherwise participate in any banking service regulatory agency or court proceeding or activity; nor to require any petition or notification to the association as a condition precedent to such a right; nor to relieve any banking service regulatory agency or court of any obligation, or affect its discretion to permit intervention or participation by a consumer or group or class of consumers in any proceeding or activity.
Section 10. Remedies provided. The remedies under this chapter shall be in addition to, and not in lieu of, other remedies provided by law.
Section 11. Severability. If any provision of this chapter shall be declared unconstitutional or invalid, the other provisions shall remain in effect notwithstanding.