Weekly Briefing

Getting theirs while the getting is good

4032013-WB

Yet another predatory lender bellies up to the political trough

With all of the negative publicity that’s been focused on bottom-feeding predators in the payday lending “industry” of late, it’s easy to forget that there are lots of other snake oil-selling lenders out there looking to prey on the less-fortunate (and trying to convince the North Carolina General Assembly to help them do it).

There are, for example, the folks who make boatloads of money on high-cost mortgages, “rent-to-own” and home repair rip-offs and other scams targeted at homeowners and home buyers.

Any day now, another group long-denied the right to operate in North Carolina – the purveyors of so-called “car title loans” – are expected to introduce legislation legalizing their pernicious practice in the state.

And then there’s the old standby of the high-cost “consumer finance” lenders who specialize in selling and repeatedly “rolling over” loans with effective interest rates of 30% (or even 40% or higher) in strip mall storefronts. Once a business dominated by smaller “mom and pop” outfits, the consumer finance industry has come to be controlled by a small handful of giant international corporations, including Springleaf Financial (formerly part of AIG) and CitiFinancial. Giant Wall Street hedge funds are among the biggest players.

Each of these industries clearly believes – with some justification – that 2013 is their big chance; that it will be the year in which a “business-friendly” General Assembly will repeal all sorts of consumer protection laws and, in the words of Governor McCrory, “unleash the private sector.”

Predatory consumer finance loans

If one proposal is to kick-off the whole assault on consumer protection laws, it seems likely to be the consumer finance industry grab. The industry has hired a veritable boogle of lobbyists, and is renowned for spreading campaign contributions far and wide. Those lobbyists have, in turn, already prevailed upon several senators of both parties to introduce a bill to dramatically raise interest rates on small loans and eliminate consumer protections.

Moreover, in the current “free for all” environment, it’s easy for overwhelmed observers to dismiss such a proposal as marginally “less egregious” than, say, the reintroduction of payday loans or the legalization of their close sibling, car title loans.

This, however, would be a big mistake. The changes contained in the consumer finance proposal would do great damage to vulnerable consumers without bringing any benefit at all.

Consider some of the following damning facts compiled by consumer advocates:

Under the proposal, interest rates would rise significantly. Currently, most lenders charge a “blended” interest rate (30% on the first $1,000 borrowed and 18% on the amounts between $1,000 and $7,500). A typical loan might have a rate of 27%. Loans between $7,500 and $10,000 (the maximum amount) are a flat 18%. Add-on fees can drive the effective rates much higher.

Under the proposal, the loans would get even more expensive and potentially much larger. The 30% rate would apply to the first $5,000 and the amount between $5,000 and $10,000 would be at 24% interest. Loans between $10,000 and $15,000 (the cap would grow) would also be at a high “blended” rate.

The bottom line impact: North Carolina borrowers would pay an estimated $50-70 million in additional interest annually.

An extensive General Assembly-requested study from the NC Commissioner of Banks found that there was and is no need to raise the cost of loans

As the Commissioner told the General Assembly:

“In light of the foregoing findings and after careful consideration of the following report and submissions from meeting participants, the Commissioner does not recommend any changes in the CFA [Consumer Finance Act], either to enhance industry revenue or increase consumer protections.”

The proposal would encourage repeat borrowing. In 2011, two-thirds of loans made by the consumer finance industry in North Carolina were to existing customers. This means consumers are frequently rolling over loans and often maintain, in effect, a revolving credit line at 25 or 30% interest. Raising rates and fees will only make it that much harder for hard-working families to escape this debt trap.

The proposal would allow late fees for the first time. This is actually a big deal. While many people are familiar with late fees on regular, lower-cost revolving charge accounts, consumer finance companies have long been forbidden from charging late fees in North Carolina because of the extraordinary interest rates they’re permitted to charge. The theory behind this law is simple and makes good sense: The extraordinary rates lenders are already allowed to charge is predicated on the notion that many borrowers will struggle to make timely payments. That’s what happens when you loan money to struggling people at sky-high rates. If late fees are to be permitted for the first time, the change should, at a minimum, mandate that the loans to which they apply be made at significantly lower rates.

The proposal would continue to encourage lenders to take security interests in personal property and cars. The consumer finance industry is not for the squeamish. Though banned from forcing borrowers to put up essential household goods like refrigerators and even medical devices as collateral (as was done in years gone by), consumer finance lenders continue to require borrowers to put up many of their most basic possessions. These possessions are frequently seized. The new proposal will assure that this practice remains a common practice.

The big picture

But the most important critique of the new proposal is this: Raising rates and fees will not make more loans available. It is always the contention of industry flaks (as it is with the payday and car title scoundrels) that higher rates are necessary in order make high-cost loans profitable enough for businesses to make them in the first place. Otherwise, the argument goes, low-income consumers will have nowhere to turn when they are in financial trouble.

But of course, the notion that what struggling people need when they are in financial trouble is a high-cost loan simply makes no sense. As consumer finance counselors constantly tell their clients: people in financial trouble invariably need less debt, not more of it.

More directly to the point, however, it should be pointed out that consumer finance lending is a niche business with a static customer base. Experience and repeated studies confirm this. Raising rates and fees will not allow more people to get credit that they need and are currently being denied; it will simply make already expensive loans even more expensive – a change that will simply generate more profits for lenders and more desperation for borrowers.

Think about it: Interest rates are currently at an all-time low. How can it possibly make sense that consumer finance loan rates should go even higher than current exorbitant rates at such a time? If the industry has managed to survive and remain profitable (even through the Great Recession) with rates contained in the current law, what possible justification can there be for raising them in 2013?

Obviously, to ask such questions is to answer them; the only possible justification is the power of the lobbying forces behind the bill.

Going forward

None of this is to imply that things are great for poor people in need of financial services in North Carolina. As the Commissioner of Banks report noted:

“The conclusions of this report are not intended to suggest that the financial services provided to unbanked and under-banked North Carolinians are satisfactory. It is to suggest that efficient and low cost services to this market cannot be fully achieved by either traditional depository institutions or traditional small loan companies.”

In other words, many poor and vulnerable people in our state certainly do need new options when it comes to financial services. Many would have a much better chance of achieving financial security and entering the middle class if they had such services. But to argue that such a need can be met by providing more usurious loans backed by Wall Street fat cats is simply laughable.

It is also a sad and revealing commentary on the state of politics in North Carolina in 2013.