Why we should say "no" to raising rates on consumer loans
Times are tough right now in North Carolina in the aftermath of the Great Recession. Federal recovery efforts have helped stabilize things and have put us back on a more hopeful track, but for the time being, things remain pretty bleak. Unemployment and poverty rates are well into the double digits and the gap between "haves" and "have nots" continues to grow. At the end of 2009, more than 1.3 million North Carolinians were receiving Food Stamps – 41% more than just two years ago. Around one in six lacks health insurance.
So what is the best and most obvious remedy? Better and healthier public services? A fairer tax system that stops taking a higher share of income from people in the middle and at the bottom than it does from the rich? How about new investments in better schools, roads and public transit?
Don't tell those ideas to the state's high cost, small consumer loan industry. Here's its solution for what ails people of modest means: higher interest rates and fees on small loans.
No, this is not a bad joke. At a time when millions of people are hurting – many because of the devastating effects of mortgage foreclosures resulting from shady, often predatory, home lending practices – the big companies that make up North Carolina's small consumer loan industry are pushing state legislators to raise the caps on interest rates and fees that they are allowed to charge.
Got it? The same companies that already make a profit off of the people who've been excluded from the mainstream lending industry want to extract even more.
"Well," you say, "there must be more to it. This must be because North Carolina's rates and fees have become obsolete and unfair to lenders. Perhaps we're not giving them a fair shake to make an honest buck."
Published data from the office of the state Commissioner of Banks shows that the majority of the industry remains profitable, even in this economy. What's more, according to a 2008 report by the highly-respected National Consumer Law Center, North Carolina already allows lenders to charge much higher rates than most other states. According to that study, 36 states have at least one small loan interest rate cap that is lower than North Carolina. Indeed, the report gave North Carolina's current small loan rates an "F" when it came to protecting consumers in two different categories.
"Well," you say, "this is just a fringe business catering to the poor. It may be sad, but it's not that big of a deal."
Wrong again. As the National Consumer Law Center report stated:
"Abusive lending practices not only harm individual consumers, but they place a needless drag on the overall U.S. economy….Consumers experiencing abusive lending practices pay more for their loans and often get trapped in cycles of debt from which they cannot emerge. As a result, these consumers have fewer resources to devote toward building family wealth."
In other words, bad, exploitative loans to people of modest means are not just bad for the poor folks who get suckered into them; they're bad for their children, for communities, and for the public institutions that must come to the rescue. In short, they're bad for all of us.
So what should lawmakers do? The small loan companies claim that their profits are down.
The answer is simple and straightforward; it's what lawmakers should have done when the predatory mortgage lending crisis was predicted by consumer advocates more than a decade ago, namely, to follow the lead of 36 other states by lowering the interest rates and fees charged to consumers. If loan companies that are already charging effective rates of 50% or more can't make a satisfactory profit, then perhaps they need to find another business.
There are a whole host of products and services from which responsible governments have long protected vulnerable, overmatched consumers. If a company's product is inherently dangerous or otherwise harmful to huge proportions of those who would buy it, public safety and well-being demands that regulators act.
That's why we have meat inspectors and rules on new pharmaceuticals. Just because some people might be okay with uninspected hamburger or untested drugs isn't enough reason to allow every meat processor or drug company to simply do whatever it wants.
The same ought to be true for 50% or 100% loans. Let's hope state lawmakers remember this simple truth.
Al Ripley is Counsel for Consumer and Housing Affairs at the North Carolina Justice Center.