Raleigh, N.C. — A proposal to allow consumer finance companies in North Carolina to charge higher rates and more fees is headed to the Senate floor after passing the Commerce Committee Tuesday on a voice vote.
The proposal, Senate Bill 489, would roll back several of the state's legal limits on consumer lending.
Lenders can currently loan up to $7,500 at a maximum annual interest rate of 30 percent for the first $1,000, and 18 percent for the next $6,500. For loans from $7,500 to $10,000, the maximum annual interest rate is 18 percent and the maximum term is seven years.
The bill would expand the cap from $10,000 to $15,000 and increase the rates: 30 percent for the first $5,000, 24 percent for the second $5,000 and 18 percent for the third $5,000. The maximum term would be eight years.
To put that into perspective, someone who borrows $10,000 can currently only be charged 18 percent annual interest. Under the proposal, that borrower could be charged 27 percent – an increase of 50 percent.
The legislation also allows finance companies to charge late fees of $15 per payment and charge up to 1.5 percent for a deferred payment.
Sponsor Senator Rick Gunn, R-Alamance, said small consumer lenders haven't been allowed to raise their interest rates in 30 years.
"Some reasonable adjustments are necessary," he said. "Forty to 50 percent of these companies have operated at a loss" over the past few years.
"We have lost over 1,000 jobs in the last decade," Gunn said of the consumer lending industry. "We sit down eye to eye and qualify these folks. The last thing I want them doing is going to these other places where they'll get the credit but the terms are not good."
Sen. Jerry Tillman, R-Randolph, agreed. "It will bring reputable lenders back to North Carolina. It will bring jobs back to North Carolina," he said of the proposal. "The need is there."
The military has been a vocal critic of such measures in the past but opted not to take a position on the bill after the addition of a section that requires the lender to notify commanding officers of loans sold to service members and bans collection calls to borrowers in combat theaters.
But the bill still faced stiff criticism from an array of other groups, from the state Department of Justice to AARP to consumer credit experts.
Attorney Jennifer Epperson with the DOJ said her agency opposes the changes. She says the consumer loan industry, like many others, suffered from the recession but is now beginning to rebound.
"We just don't think that, in this time, what we need to do is raise rates to enable finance companies to have more profits and make more money," Epperson said.
According to data from the state Commissioner of Banks, two-thirds of these small loans are refinanced, or "flipped."
"It expands practices that we already classify as predatory," Helen Savage with AARP of North Carolina told the committee. "Multiple loan flips are terrible for borrowers but great for lenders. They're allowed to charge credit insurance premiums over and over."
Consumer advocates say loan insurance products are the newest wrinkle in predatory lending. They say lenders push borrowers to buy the policies, and borrowers sometimes don't realize they've bought them till after they've signed the loan paperwork.
The insurance isn't a fee per se, so it isn't included in rate calculations under current state law. But it is rolled into the balance of the loan, and is highly profitable for the lenders.
"This bill targets my clients," bankruptcy attorney Stephanie Ceccato told the committee. "The elderly, the working poor, families struggling to make ends meet."
"I've seen them put up the few possessions they have as collateral." she said. "They lose the cars they need to go to work, the computers their kids use to do their homework."
But consumer lenders defended their industry.
Ken Kenyon with the North Carolina Financial Services Association said the flipping numbers "don't paint the whole picture." He insisted that stories like Ceccato's are not the norm.
Erin Wagner with the Resident Lenders of North Carolina said her customers come to her finance company "because it's a disciplined, low-cost way to borrow" and is better regulated than Internet lenders.
"The worst thing I could do is make a loan to a customer that can't repay it," Wagner said. "My business lives or dies by customer satisfaction."
The public comment session had lasted no more than 15 minutes when bill co-sponsor Sen. Buck Newton, R-Wilson, gave the chairman a hand signal to wrap up the meeting.
The final witness hadn't even made it back to her seat when the committee voted. The vote sounded close, but committee Co-Chairman Wesley Meredith announced it had passed. Its next stop is the Senate floor.
The lending industry has poured money into lobbying this session in an attempt to advance the bill, but it's unclear how well it will fare if it gets to the House, where leaders have expressed little enthusiasm for the proposal.
Spokeswoman Crystal Feldman also said in February that Gov. Pat McCrory doesn't support "high-risk loans" that could increase the financial burden on families.