RALEIGH — A bill that would raise interest rates for most consumer finance loans sailed through a House committee after two consumer advocacy groups withdrew their opposition in the wake of an 11th-hour compromise.
The amended bill calls for lower interest rates than the version passed earlier this month by the Senate, but the rates on most consumer finance loans would still be higher than what’s permitted under the current law. Companies such as OneMain Financial and Springleaf make loans to consumers who typically have a poor credit history that leaves them with limited options.
Two groups that had been ardent opponents of the measure – the N.C. Justice Center and the Center for Responsible Lending – still don’t support the legislation but changed their stance to neutral after a compromise was reached a few hours before the House Banking Committee met Thursday morning. Industry groups and senators who sponsored the bill also participated in the deal-making.
“We understand the political reality,” said Chris Kukla, senior counsel for government affairs at the Center for Responsible Lending in Durham. “We are trying to make the bill less harmful.”
Still, several critics spoke out against the bill before the committee approved it by voice vote in which no dissents were audible. The favorable vote sends the measure to the House floor; the earlier version was approved 39-9 by the Senate.
The industry has been pushing the legislation, arguing that the interest rates they charge haven’t changed in three decades and noting that the most recent report from the state commissioner of banks found that 40 percent of consumer finance companies reported operating losses in 2011.
Consumer finance loans currently are capped at $10,000, but the bill would raise the maximum to $15,000. The bill also would lower the maximum interest rate from 36 percent to 30 percent, although critics carp that the current maximum applies to few loans because it’s limited to loans of no more than $600.
Rates vary by loan size
The amended bill calls for a 30 percent interest rate on loans of $4,000 or less. For larger loans, 30 percent still applies to the first $4,000, with the rate lowered to 24 percent for an additional $4,000 and lowered again to 18 percent for the next $2,000. So a $10,000 loan would blend three rates.
In addition, loans from $10,001 to $15,000 would carry a flat 18 percent rate for the entire amount.
The prior version of the bill, by contrast, called for a 30 percent rate on the first $5,000, 24 percent on the next $5,000, and 18 percent for the next $5,000. Unlike the revised bill, there was no flat rate for loans from $10,000 to $15,000.
“I think it’s a good bill,” said Rep. Rick Glazier, a Fayetteville Democrat. “It has been made even better by the amendment.”
Laura Collins Britton, an attorney on the faculty of the law school at UNC-Chapel Hill, tried to turn one of the arguments voiced by bill supporters on its head.
“What you have heard,” she told the committee members, “is these loans are necessary because these are consumers who can’t go anywhere else. That actually is true, but in light of that, we should not raise the rates on these borrowers who are trapped in these loans.”
Cycle of debt
Britton said many consumers end up in a cycle of borrowing because they can’t afford their payments and end up taking out another loan to pay off the debt. In addition, she said, borrowers frequently purchase “extremely expensive” credit insurance policies, such as life insurance that would pay off the loan if the consumer dies, that they don’t really understand.
Britton said she once had a client who came to her six years after borrowing $5,000 from a consumer finance company.
“After six years of paying, she owed more than when she originally got the loan,” Britton said. “That’s because it had been refinanced over and over and over again.”
Likewise, Jennifer Epperson, an attorney for the state Justice Department who spoke on behalf of Attorney General Roy Cooper, testified that higher interest rates aren’t warranted.
“All insurance products that are offered are optional, and they must be explained,” said Sen. Rick Gunn, a Burlington Republican and a primary sponsor of the Senate bill.
Gunn also argued that the industry doesn’t make these loans willy-nilly.
“It is important for the committee to know that 44 percent of the (loan applications) are denied,” he said.