North Carolina experimented with high-cost lending between 1997 and 2001 when payday loans were legal in our state. Now we are in danger of blessing usurious debt once again. We have in place a strong cap on usury, the practice of making loans at unreasonable interest rates.
Sen. Rick Gunn, a Burlington Republican, introduced SB 681 that would double or in some cases triple the interest rates on consumer installment loans. Current law caps the annual percentage rate on installment loans at about 40 percent. This bill would allow APRs as high as 80 percent to 125 percent. This increase would come just two years after the same lenders persuaded the legislature to allow them to charge higher rates on a large swath of loans.
Gunn’s bill would hurt North Carolina families and violate our shared desire to create and sustain life-giving community and support of abundant life for all. Interest rates of 80 percent are usurious and violate our highest values. People of faith are called by God to help the poor, never to take advantage of them.
We give thanks that payday loans have been illegal in North Carolina since 2001. Research is clear that payday loans are debt-trap loans, designed to keep borrowers in debt at high interest rates as long as possible. SB 681, with its extraordinarily high interest rates and fees, would also keep borrowers in debt at high interest rates, leading to another form of debt-trap lending.
Federal regulators are well aware of the problems created by debt-trap loans. The Department of Defense proposed new rules to cap interest rates on installment loans to members of the military at an all-inclusive 36 percent APR, much less than the limits authorized by SB 681.
On another front, the federal Consumer Financial Protection Bureau is considering a proposal to protect the broader public by reining in installment, payday and car-title lending abuses. The proposal is smart, fair and flexible, but it does include a loophole that advocates will be pushing the CFPB to close – an option that lets lenders make some loans without determining whether a consumer has the ability to repay the loan without renewing the loan or falling behind on other bills.
No one in North Carolina should have to choose between
paying off a predatory lender and putting food on the table for her family or heating his home.
The protections we have in North Carolina were the result of great effort. North Carolina was the first state to ban payday lending after it was made legal. After the ban, the N.C. attorney general and the commissioner of banks lead a years-long campaign against predatory lenders who used various schemes to stay open. This experience should show legislators and federal regulators the perils of loopholes or laws opening the door to predatory lenders again.
Our General Assembly and our federal regulators need to protect our citizens from debt-trap loans. A strong state usury cap, like ours in North Carolina, is the most effective way to prevent high-cost lending. CFPB by statute is not allowed to set a federal usury cap; therefore, our state legislators must maintain our strong North Carolina cap to keep debt trap loans illegal in our state.
It is imperative that we urge our legislators for continued protection against usury so that predatory lenders do not have opportunity to trap our neighbors in crushing debt.
Hope Morgan Ward of Garner is the resident bishop of the N.C. Conference of the United Methodist Church.