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@NCCapitol

Higher loan rates headed to Senate floor

Posted April 30, 2013
Updated May 2, 2013

Money generic, dollars

— 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.

13 Comments

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  • HeadsUp May 1, 11:28 a.m.

    Laura Leslie obviously doesn't like it, but traditional, regulated consumer finance loans are comparable to credit cards in their amounts, interest rates, and fees.

    They are NOT payday loans. And their customer satisfaction appears to be high.

    I say give people the option. If they qualify for a loan, let them get one, pay it back, and improve their family's life.

  • rushbot May 1, 9:01 a.m.

    Usury is Usury. This is gouging the poor!!!

  • samr May 1, 8:25 a.m.

    Granted, the rate is much better than what used to be charged but in order for the jobs created by this industry to be sustainable, you will need a virtual endless supply of customers. This would create a cycle of debt that these borrowers would never get out of.

  • rbshort May 1, 7:58 a.m.

    This industry serves those who have credit that is weak, which means the risk of default is much greater. When rates are limited to 18%, these businesses lose money. So by allowing a profit, people gain access to credit and jobs are created. It is a win win.

    I do not understand how eliminating loans to people with poor credit helps anyone.

  • samr Apr 30, 6:26 p.m.

    "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."

    What a crock and a myopic outlook. Her business lives and dies by flipping the loans. And when that is not possible any longer, these loans lead to higher bankruptcy filings so while she made not be repaid by the borrower, the burden of the bankruptcy often falls on us, the taxpayer. I guarantee you that she doesn't care one bit who pays her back so she has no interest in making a quality loan.

  • Road-wearier Apr 30, 6:11 p.m.

    Leeches. Because 30% and 18% rates aren't high enough. And once again we see who the GOP is really in Raleigh to serve...and it's not the people of NC. It's only the businesses and the wealthy.

  • sisu Apr 30, 6:00 p.m.

    Here’s a fun fact: 30% rate on a $1,000 installment loan is less than $175 total interest over the 12 months it takes to repay the loan. Compare that to your credit cards. Here’s a novel idea: give people choices and let them make their own decisions about where to borrow money! Nobody is forcing people to use these lenders. The fact is, as someone who has used this type of loan, the costs are reasonable and the service is great. Thank goodness there are sensible Democrats and Republicans in Raleigh that have looked at the facts about these types of loans and chosen to support this bill.
    bridgewater951
    April 30, 2013 5:21 p.m

    You're kidding, right? Take a look at our credit cards? Um, 0%, 0%, 2.9%, 7.75%. Tell me again how 30% is such a bargain. The only "choice" here in this new bill would be to give the loan sharks already charging astronomical rates the choice to raise them even higher. People who are driven to this level of desperation are not "choosing". Puhleeze.

  • bridgewater951 Apr 30, 5:21 p.m.

    Here’s a fun fact: 30% rate on a $1,000 installment loan is less than $175 total interest over the 12 months it takes to repay the loan. Compare that to your credit cards. Here’s a novel idea: give people choices and let them make their own decisions about where to borrow money! Nobody is forcing people to use these lenders. The fact is, as someone who has used this type of loan, the costs are reasonable and the service is great. Thank goodness there are sensible Democrats and Republicans in Raleigh that have looked at the facts about these types of loans and chosen to support this bill.

  • Run4orest Apr 30, 4:51 p.m.

    Why don't they just allow indentured servitude?! Better yet, bring back debter's prisons! I mean- that would better reflect the thinking of today's GOP, right?!!

  • sisu Apr 30, 4:44 p.m.

    Okay, so, I get a whopping 3/4 of one percent on my money market and 1/4 of one percent on my savings and the loan sharks aren't getting enough margin at the current rates of thirty percent or eighteen percent. Poor babies. They must really be suffering. By all means, they should get more than that from those desperate enough to seek their services. Goodness knows, anyone willing to take out a loan at a rate of 30% must have tremendous income to repay it. They're just taking it out for giggles.

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