Piling 'late fees' atop profitable storefront loans

April 25, 2010 

— A lot of people are rightfully up in arms these days about the swarm of industry lobbyists who have descended, locust-like, on the national capital as Congress considers reform of the financial industry. According to news reports, hundreds of lobbyists and industry representatives recently attended a Senate committee meeting where legislation to rein in some of the worst Wall Street abuses was considered.

Now, it turns out, there's a smaller version of the same problem going on in Raleigh that even includes some of the same institutions. Only in this case, there isn't any actual reform on the table.

Over at the General Assembly, state lawmakers are advancing proposals pushed by a coterie of lobbyists from the high-cost consumer loan industry (these are the folks who run storefront offices that make loans with interest rates of 30 percent and more). For years, these folks have been complaining that they haven't been able to make enough profit loaning money at these rates and have been demanding that lawmakers loosen the rules.

A recent presentation by the agency that audits and regulates these lenders (the Office of the Commissioner of Banks), however, found that most small loan outfits operating in North Carolina have remained profitable - even during the economic downturn. This impressive achievement may be due in part to the fact that extra fees already permitted on these loans make the effective rates even higher than they appear. Indeed, the effective annual rates on some loans can already be 45 percent or 50 percent or higher.

While the commissioner's report acknowledged that the industry has not been growing, this is not necessarily surprising news, given the hard economic times. It may also not be particularly bad news given the fact that many small loan borrowers would be better off without a 28 percent or 30 percent loan bleeding their incomes. At a minimum, this would not appear to be an industry that state officials should be worrying too much about trying to grow.

None of this, however, is stopping the loan company lobbyists (some of whom are tied to the giant Wall Street investment banks) from pushing a new effort to extract more from small-time North Carolina borrowers. Their big new idea: a legislative proposal to permit high late fees.

At first blush, this might not seem that terrible. After all, late fees on loans are not particularly new. But here's the problem: North Carolina's current ban on high late fees on these types of loans was part of a deal - the deal that allowed these companies to charge extremely high interest rates in the first place.

You see, when you miss a payment deadline on a 30 percent loan, you're already paying a significant "late fee"; the debt will grow rapidly every day your payment is late.

Perhaps even more to the point is that late payments are a fact of life in the high-cost loan industry. These companies already know that a high percentage of payments - as many as half or more - will be late. When you're loaning money to the group of vulnerable, life-on-the-edge borrowers that this industry targets, that's just part of the deal.

So, the bottom line here is that the industry wants to squeeze more money out of down-on-their-luck borrowers (there's really no other way to characterize someone who is borrowing money from a storefront lender at 28 percent). If the lobbyists can get the General Assembly to approve a late fee of, say, $20, the companies stand to make a boatload of bucks.

In 2008, there were more than 425,000 of these loans in North Carolina. If the average loan included four late payments per year (and, remember, there's reason to think the number would be higher), the industry would reap a cool $34 million in extra profit. As a practical matter, this would amount to a "small loan tax" that would eat up a third or more of the money that the state provides to lower-income working families via the state earned income tax credit each year (currently about $80 million-$90 million per year).

Fortunately, the proposal is far from a done deal. A legislative study commission considering the idea in advance of the short session that convenes in May has yet to endorse it. Especially in light of the major national financial overhaul that is pending in Washington, let's hope the group decides to give the "late fee tax" (or any other price increase) a lot more study before socking it to already struggling consumers.

Rob Schofield is the director of research at N.C. Policy Watch.

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