Consumer advocacy groups have lined up to oppose a bill that would allow consumer finance companies to charge borrowers much more than they do now.
The groups say the combination of interest rates and fees that consumer finance companies such as CitiFinancial and American General currently charge can add up to an annual percentage rate, or APR, as high as 54 percent.
"The law right now already has a high APR," said Al Ripley, director of consumer affairs for the N.C. Justice Center. "There is no need to raise interest rates and fees."
The bill pending in the House would permit the companies to charge rates and fees that could exceed a 100 percent annual percentage rate, the consumer groups complain.
If the bill becomes law, "many borrowers will be trapped in these loans and won't be able to afford to pay them off, because the cost is so much higher," Ripley said.
Consumer finance companies make loans of up to $10,000 for car repairs, vacations, funerals, weddings, debt consolidation and other needs and wants. Most borrowers have bank accounts and credit cards, but may have a tarnished credit history that limits their options, according to a report by the state banking commissioner.
The bill, which has bipartisan support, is backed by an industry trade group, the N.C. Credit and Personal Finance Council. The bill is on the House Banking Committee's agenda for today.
The bill's chief sponsor, Rep. Fred Steen, a Republican from Rowan, said he had had consumer advocates and industry representatives in his office Wednesday.
"There will be changes to the bill when it comes to committee to add consumer protections," he said.
"They are talking about ways to prevent flipping of loans, going from one loan into another, and what information borrowers should get before signing. ... We have an understanding of where it needs to go."
Steen also said the bill was needed because the law had not been updated in more than 20 years.
But state Banking Commissioner Joseph Smith concluded in a report delivered to the legislature in February that no changes in state law were needed "either to enhance industry revenue or increase consumer protections."
The commissioner found that the majority of consumer finance companies operating in the state "remain profitable and the potential for profitability continues to exist under the current framework, although lenders may not be as profitable as they would like."
But C. Everett Wallace, policy adviser and counsel at N.C. Credit, said the industry needs to be able to cover its rising costs.
"It's been 28 years since the rates have been changed," Wallace said. "Inflation has increased over 120 percent (during that span) so our operating costs have gone up tremendously."
Wallace pointed to a study by the banking commissioner that found the average interest rate charged by consumer finance companies in 2009 was 24 percent. He stressed that the bill wouldn't raise the maximum interest rate companies can charge.
APR is only for purposes of comparison and focusing on it is a red herring, Wallace said.
"So you could tell me it is a zillion APR. That's not the interest rate you are paying."
Ripley countered that focusing on interest rates is misleading because the bill calls for higher fees that can add up quickly. APR incorporates fees and interest.
The bill would allow the loan companies to charge a monthly "handling charge" of up to $3 for each $100 borrowed. That means that someone who borrowed $1,000 could be charged fees of $30 a month, or $360 a year - in addition to their interest rate, Ripley said.
The bill also calls for a second charge, a "processing fee," equal to 10 percent of the loan amount - up to a maximum of $100 - that would be paid upfront. That could add another $100 on that $1,000 loan, for a total of $460 in fees alone.
"It ensures they can make as much profit as they want," said Chris Kukla, senior counsel for government affairs at the Center for Responsible Lending.
The consumer groups also released a letter opposing the bill written by retired Adm. Steve Abbot, president of the Navy-Marine Corps Relief Society, which provides financial and educational assistance to military personnel.
"We believe these changes would be harmful to sailors, marines and their families struggling to make ends meet in this difficult economy," Abbot wrote to the legislature. Abbot couldn't be reached for additional comment.
Staff writer Lynn Bonner contributed to this report.
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