People who need fast cash could end up paying higher interest rates under a bill being pushed in the state Senate by the consumer finance industry – and ardently opposed by consumer advocates.
The industry says the state’s 30-year-old consumer finance laws need to be updated to reflect the increased cost of doing business.
Consumer advocates say the industry is doing just fine and that such loans prey on people who can least afford it. People like Sharon Crouse.
Health problems – diabetes and high blood pressure – caused Crouse, 51, to take out her first consumer finance loan a half dozen or so years ago.
“I’m on quite a few prescriptions; that’s not cheap,” said Crouse, who is from Brunswick County.
She ended up with separate loans from five different companies.
Last year, she refinanced each of them – and took out some cash as well. Altogether, according to her loan documents, she borrowed $6,486.14. After paying off her past balances, Crouse was left with $2,165.48.
Meanwhile, the consumer finance companies collectively were in line to collect $1,649.67 in interest charges and fees over the life of those loans. Not to mention hundreds of dollars they collected up front for various insurance policies, such as life insurance, that would pay off her loan if she died.
“People do stupid things and desperate things in certain situations,” Crouse said.
Senate Bill 489, which is in the Senate Commerce Committee, is stridently opposed by consumer advocacy groups, while the industry is solidly behind it. The bill has attracted 23 sponsors and co-sponsors, 19 Republicans and four Democrats.
The industry is selling the bill as a measure to reduce rates because it cuts the maximum interest rate from 36 percent to 30 percent. But the bill would also raise the rates on loans above $1,000.
Currently there are two laws that govern consumer finance. Most companies operate under the law that allows a 30 percent interest rate on the first $1,000 borrowed and then 18 percent on the next $6,500. A handful of companies operate under a different law that lets them charge 36 percent interest on the first $600 and then 15 percent on the next $2,400.
Opponents stress that the loans that carry the highest rate, 36 percent, accounted for just 3.3 percent of the 461,588 consumer loans made in North Carolina in 2011, according to the latest report from the state commissioner of banks.
The bill now being considered would consolidate all loans under one law with the 30 percent interest rate expanded to loans of up to $5,000, and a 24 percent rate applied to the next $5,000. The bill also would raise the maximum loan amount from $10,000 to $15,000, and apply an 18 percent rate on the final $5,000.
Erin Wagner, president of the Resident Lenders of North Carolina, an industry trade group, said the bulk of the loans in the state are for less than $3,000 – 72 percent, according to the banking commissioner’s latest report.
Under the bill, she said, monthly payments would be unchanged on a $1,000 loan, would rise $1.36 per month on a $1,500 loan, and would climb $9.18 on a $3,000 loan.
The industry argues that the new law is needed because 40 percent of the consumer finance companies in the state reported operating losses in 2011, and that the industry has lost 1,000 jobs statewide in the past decade.
Consumer advocacy groups scoff at the notion that the industry is struggling.
“They are making a lot of money on these loans,” said Al Ripley, director of the N.C. Justice Center’s consumer and housing project.
Under the current law, Ripley said, consumer finance companies “highly encourage” consumers to purchase credit insurance policies that will pay off their loans if, for example, they die or they lose their jobs. Those policies can add hundreds of dollars to the cost of a loan.
‘Debt doesn’t solve problem’
In 2011, consumer finance companies in North Carolina collected $68.6 million on insurance premiums. Three out of four borrowers took out credit life insurance policies in conjunction with their loans, according to the banking commissioner’s report.
One Wake County consumer who borrowed $2,283.46 also purchased four different types of insurance policies that cost $433.82, according to court documents.
Beth Young, a staff attorney with the Financial Protection Law Center, a nonprofit law firm in Wilmington, said consumers often purchase life insurance because they erroneously think, if they die, the consumer finance company has the right to demand loan payments from family members.
“It’s irrational how much people pay for it,” she said.
Industry officials counter that the life insurance rates are established by state law.
“I would like to point out that (the insurance policies) are all optional,” said Wagner, who disputed that consumers are pressured to buy such policies. Many consumers, she said, ask about insurance that would protect them if they became disabled.
Young contends the industry preys on cash-strapped consumers who often don’t understand what they’re getting into.
“They are pushing debt on people for whom debt doesn’t solve the problem,” she said. “Debt makes the problem worse.”
Most borrowers have bank accounts and credit cards, but their tarnished credit histories limit their options.
Cycles of borrowing
Bill opponents also argue that, with 66 percent of the loans in North Carolina made to existing customers, it’s clear many people can’t afford to pay off their loans and are caught in a cycle of borrowing.
Ripley buttresses his argument with a collection of loan documents showing that people who borrowed significant sums of money ended up with as little as one cent because the rest went to pay off their old debts.
He points to a 2008 lawsuit that Colorado’s attorney general brought against South Carolina-based Security Finance. The complaint alleged that the company had pushed consumers to refinance loans.
“Security Finance accomplishes this by engaging in underwriting practices that continually place consumers into loans and refinances they have no reasonable probability of repaying,” the suit alleged. “Security Finance’s business model causes injury to consumers by trapping them in a cycle of debt, and allows Security Finance to collect additional payments and charges to the further detriment of its customers.”
Security Finance, which denied the allegations, entered into a consent agreement with Colorado’s attorney general in 2010, but did not admit to any wrongdoing. Security Finance, which also operates in North Carolina, didn’t return calls seeking comment.
Industry officials point out that not just anyone can obtain a loan. Forty-four percent of loan applications were denied in 2011, while 52 percent were approved, according to the state banking commissioner’s report. The remaining applications were withdrawn.
Repaying the loans
Ken Kinion, president of the N.C. Financial Services Association, which represents the two largest consumer finance companies operating in the state, cites state banking commissioner data that show that 92 out of 100 consumers were current on their loans at the end of 2011.
Kinion contends that “very few renewals” are made to consumers who need to refinance their loans and come away with virtually no cash. Instead, he said, most renewals involve customers who are current on their loans and “for one reason or another are seeking additional money.”
Under state law, Wagner said, a consumer loan company can have only one outstanding loan per consumer. So the only option if a consumer wants to borrow additional money is to pay off the old debt as part of the transaction.
Wagner said the fact that two-thirds of loans are to current customers means that customers are satisfied.
“They’re under no obligation to go back to the lender they know,” she said.
Wagner, who is vice president of family-owned Wagner Financial Services, which has three offices in the Greensboro-Winston-Salem area, also stressed her company is focused on credit-worthy customers.
“I don’t have any incentive to (loan money to) somebody that can’t repay it,” she said.
Meanwhile, Sharon Crouse lost her $14,000-a-year file clerk job in October and recently filed for bankruptcy.
She’s determined to start living by the maxim she learned from her father when she was a little girl: “If you don’t have the cash, don’t buy it.”