NC consumer loan bill spawns opposition

A new bill in the state legislature that would hike costs for North Carolina borrowers who take out small consumer finance loans has drawn opposition from advocacy groups and religious leaders.

Critics say the bill would double the maximum interest rates on some small loans in addition to significantly increasing fees.

“These loans are already available,” said Bill Rowe, director of advocacy for the N.C. Justice Center. “This is just more money (that will go) to the consumer finance companies.”

The bill is being pushed by a coalition of consumer finance companies called the N.C. Independent Finance Association.

Matt Bales, the association’s executive director, said the current regulatory scheme makes it difficult for borrowers who desperately need a small loan of up to $1,500 to get the cash they need. He contends that critics are engaged in “fear-mongering” and that the changes sought by the industry are needed to expand the availability of “safe, responsible, regulated loans.”

Individual borrowers with poor credit scores rely on consumer finance loans from companies such as OneMain Financial and Springleaf Financial when they are short on cash.

The consumer finance bill, SB 681, was introduced in the Senate at the end of March and has been referred to the Commerce Committee.

The bill’s primary sponsor is Sen. Rick Gunn, a Republican from Burlington and the committee’s co-chair. Gunn declined to be interviewed for this story; a member of his staff said that the bill “is not ready to be heard” by the committee.

But the bill has opponents worried. They’re well aware that two years ago, the industry had sufficient political muscle to persuade the legislature to pass a measure, which was signed into law by Gov. Pat McCrory, that raised interest rates for most consumer finance loans.

Attorney General Roy Cooper has lined up with opponents of the bill.

“Consumers would pay a lot more for small loans under this new law, making it that much harder for people to dig their way out of debt,” Cooper said in a statement. “North Carolina has long had strong limits on interest rates and we shouldn’t weaken those protections.”

Even before the new bill was introduced, religious leaders – including the state’s Episcopal bishops and the Southern Conference of the United Church of Christ – wrote letters to top legislators urging them not to raise rates.

“The reason they knew it was coming was because the industry had been talking about this even before a bill was filed,” said Ellen Harnick, senior policy counsel for the Center for Responsible Lending.

“Consumer loans in North Carolina are now capped at 30 percent annual interest,” four Episcopalian bishops wrote in their letter. “Proposals to increase the cost of consumer finance loans ... fly in the face of the Bible’s prohibition against usury.”

Cycle of debt

The proposed bill would, in effect, raise both interest rates and hike the fees on small consumer finance loans that range in size from $300 to $1,500. It does not address rates and fees for larger loans.

Harnick said that many consumers already have such a hard time paying off these loans that they end up stuck in a debt cycle. The latest study by the state banking commissioner found that 52 percent of consumer finance loans that were taken out in 2013 were renewals of existing loans.

Bales, the industry representative, says that argument is “speculative” because the banking commissioners’ report doesn’t break out the percentage of loans less than $1,500 that are renewed.

Current law stipulates an origination fee of up to $25 for loans of up to $1,500, but the bill would permit loan companies to charge an “investigation fee” equal to 10 percent of the loan amount.

Bales said the investigation fee would enable loan companies to determine whether borrowers are capable of repaying the loan, ensuring that they don’t get caught in the cycle of debt.

“This is protection for them,” he said.

‘Installment fee’

Under current law, the interest rate on loans of up to $1,500 are capped at 30 percent.

The new bill avoids any mention of interest rates, instead stipulating that the “installment handling fee” that consumers can be assessed monthly is capped at $5 per $100 of the loan amount up to $500. For loans above $500, the rate is $4 per $100 above the loan amount.

On a $500 loan, the monthly fee would be $25 per month, or $300 per year. That translates to an interest rate of 60 percent, double the current maximum rate, Harnick said.

Harnick contends that loan companies typically charge the maximum rates. She pointed to the latest annual report filed by a publicly traded consumer finance company, World Acceptance Corp., which states: “The company believes that virtually all participants in the small-loan consumer finance industry charge at or close to the maximum rates permitted under applicable state laws in those states with interest rate limitations.”

Although World Acceptance doesn’t operate in North Carolina, it is part of the N.C. Independent Finance Association.

Still, Bales said that competitive pressures would mitigate the maximum rates outlined in the bill.

“These rates are not what these companies will necessarily charge,” he said. “These are the statutory ceilings.”

Bales said that consumers desperate for cash are flocking across the border to South Carolina or borrowing money from unregulated online lenders because, under North Carolina’s current regulatory scheme, small consumer loans are hard to come by.

“There is a hole in the market,” he said. “This legislation fills that hole in the market.”

The state banking commissioner’s 2013 report found that consumer finance companies made 55,060 loans for up to $1,000 in North Carolina in 2013. That was roughly 10 percent of the 553,432 total loans made by the industry in that year.