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Bill would hike interest on consumer finance loans

Consumer advocacy groups are sounding the alarm about a bill recently introduced in the state legislature that they say would enable consumer finance companies to hike the rates they charge most borrowers.

The industry counters that many consumer finance companies are losing money operating under a system that hasn’t been updated in 30 years and that rates on small loans actually would decline.

The bill, SB 489, has considerable legislative support. Of 23 primary sponsors and co-sponsors, 19 are Republicans and four are Democrats.

“There’s a formidable number of people on the bill,” said Chris Kukla, senior counsel for government affairs at the Center for Responsible Lending in Durham. “We hope that legislators will understand that raising interest rates now, especially while whatever economic recovery we have isn’t taking full hold, is just not a good policy decision.”

Consumer finance companies operating in North Carolina, such as OneMain Financial and Springleaf, currently make loans of up to $10,000. Most borrowers have bank accounts and credit cards, but their tarnished credit history limits their borrowing options.

Ray Grace, the interim state commissioner of banks, which regulates consumer finance companies, has taken no position on the bill.

Kukla estimates that the bill would cost North Carolina borrowers $50 million to $70 million more in annual interest costs if it becomes law.

The bill actually would cut the maximum interest rate on consumer loans from 36 percent to 30 percent. However, the highest rate currently applies to loan amounts of up to $1,000, with lower rates kicking in for higher amounts. But the bill would permit lenders to charge the 30 percent rate for loans of up to $5,000.

The bill also would raise the maximum amount consumer finance companies can loan from $10,000 to $15,000 and would raise the interest rate on higher-dollar loans.

For example, currently a $7,500 loan would carry a 30 percent interest rate on the first $1,000 and 18 percent on the additional $6,500. But under the bill the interest rate would be 30 percent for the first $5,000 and 24 percent on the next $2,500.

Al Ripley, director of the N.C. Justice Center’s consumer and housing project, said the consumer finance companies don’t care about giving up the 36 percent rate on their smallest loans “because they are going to make so much money” on larger loans.

Ripley added that, based on data from the state banking commissioner, 66 percent of the loans made by the industry in 2011 were to consumers in North Carolina who already had a consumer loan. That shows that many people can’t really afford to pay off their loans and are caught in a cycle of borrowing, he said.

Contributing to that cycle, Ripley said, is that consumers are “highly encouraged or told they have to” purchase various types of insurance that will pay off their loans if they are unable to meet their obligations – for example, if they die or if they lose their job. He cited the example of one borrower who paid nearly $400 in insurance fees on a $1,400 loan.

But Erin Wagner, president of the Resident Lenders of North Carolina, an industry trade association, said the current law that governs consumer finance companies hails back to 1983 and needs to be updated given that, according to the most recent report from the state commissioner of banks, 40 percent of the consumer finance companies reported operating losses in 2011.

“$1,000 in 2013 doesn’t buy what it brought in 1982, or 1992, for that matter,” she said. “Operating a business is more expensive in 2013.”

Wagner said that the new rates the bill calls for are “pretty modest,” and added: “We’re reducing the overall maximum rate.”

“On a typical $1,500 loan – and I know for my company that’s about an average-size loan – under this new legislation the amount of interest the consumer would pay is about $1.36 more per month,” she said. Wagner is vice president of family-owner Wagner Financial Services, which has three offices in the Triad.

Ken Kinion, president of the N.C. Financial Services Association, which represents the two largest consumer finance companies operating in the state, said that the current regulations force companies to keep a tight rein on credit.

“We believe this legislation would allow us to reach more customers, pure and simple,” he said.

Two years ago a bill that called for higher interest rates on loans from consumer finance companies passed the state House but stalled in the Senate.

That bill, which was different from the legislation now before the Senate, was opposed by some military leaders. But Kinion said the current bill was drafted to address some of the military’s concerns, including a provision that calls for companies to confirm whether a borrower is in the military and to notify company commanders when enlisted personnel seek a loan. It also enables a member of the military to cancel a loan contract by returning the loan amount within 30 days.

The N.C. Commanders Council, a group of military commanders in the state, is taking no position on the latest bill, said Paul Friday, deputy director of government and external relations at Camp Lejeune. Friday said that the group’s neutrality wasn’t an endorsement of the bill or of its provisions regarding the military.

However, Steve Abbot, a retired admiral and CEO of the Navy-Marine Corps Relief Society, a nonprofit that provides financial assistance to current and retired Marines and Sailors and their families, has weighed in against the bill.

“This legislation will increase the already high interest rates and fees charged on consumer finance loans in North Carolina,” Abbot wrote in a letter to legislators. “We understand that the consumer financial industry has included provisions purportedly intended to protect military personnel, but we don’t believe these provisions adequately protect military personnel.”

Ranii: 919-829-4877
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