Veering way off track

Veering way off track

- in Weekly Briefing

Bill for consumer loan industry shows again just how far the GOP legislature has strayed from its supposed goals

It has already been well-documented in recent weeks just how far astray the new Republican leaders in the North Carolina General Assembly have led their members from the supposed pre-session objectives of renewing the economy and stimulating job growth. As Taylor Batten, editorial page editor of the Charlotte Observer was moved to write last weekend:

The substance has been as disappointing as the process. The Republican mantra has been, appropriately, jobs, jobs, jobs.

But almost three months into the session, jobs have been the primary focus of very little legislation. What has your legislature, led by House Speaker Thom Tillis and Senate President Pro Tem Phil Berger, been doing instead?

  • Fighting to repeal federal health care reform.
  • Working to expand gun-owner rights.
  • Making emergency room doctors almost completely immune from any penalties for practicing sloppy medicine.
  • Trying to decline $461 million in federal money for high-speed rail that would instead go to another state.
  • Requiring photo identifications from voters.
  • Overturning already-completed annexations.
  • Contemplating a constitutional amendment banning gay marriage.
  • Working to bar the state from giving any money to Planned Parenthood.
  • Aggressively expanding charter schools.
  • And one out-of-touch freshman even introduced a bill creating a new currency based on the gold standard, in case the Federal Reserve defaults.

You may agree or disagree with some or all of those initiatives. Either way, they have next to nothing to do with creating jobs or balancing the state budget.”

And if Batten’s column doesn’t lay to rest, once and for all, the notion that jobs, the economy and average North Carolinians are (or were) truly at the center of conservative legislative priorities, a proposal under consideration this week in the House of Representatives simply has to be the nail in the coffin.

Jacking up loan rates on borrowers

On Thursday, a House committee will take up a bill drafted by lobbyists for the consumer finance industry – i.e. the companies that sell, high cost, store front loans to consumers with poor credit – that would raise the already remarkable rates and fees these companies charge to stratospheric levels. Current law already allows these lenders to charge a combination of rates and fees that produces effective rates of as high as 54% APR. Under the industry drafted bill, the rate will soar above 90% APR.

Here are some other fairly remarkable facts about the proposal:

The industry is already profitable – Unlike some consumer products, state and federal regulators have long placed some basic regulations on the consumer finance industry. There are two obvious reasons: 1) Consumer lending is inherently confusing and mysterious, and 2) the target customers for this industry are people already in economic difficulty – that is, people with low enough income and high enough debt that they can’t qualify for a typical credit card. Law enforcement officials and regulators have learned through years of experience that if caps are not placed on these loans, rates and abusive practices will invariably get out of control. Witness the usurious rates of the “payday lending” industry before North Carolina kicked it out of the state a few years back.

Despite the limits placed on these loans (the interest rates, the fees, where the loans can be sold and what they can be packaged with, how many times the loans can be “flipped” in a year), the industry remains profitable. Indeed, it’s so profitable that a recent North Carolina Commissioner of Banks study concluded that the loan companies even made a profit in 2008 at the lowest depths of the recession – a time when every mainstream bank was drowning in red ink. That’s among the reasons why the same report said there was no evidence that the industry was in need of any higher rates or fees.

Big, out-of-state companies dominate the industry – Though frequently portrayed by the large fleet of lobbyists the industry has retained as a “mom and pop” industry, the consumer loan business is dominated by a group of six out-of-state lenders, who control 80% of the North Carolina market. By far, the two largest of these companies are CitiFinancial (which is part of the giant CitiGroup) and American General (which is owned by the much maligned conglomerate AIG and a New York hedge fund).

Higher rates and fees are inherently predatory – According to the industry, the reason it needs higher rates and fees is so that it can loan more money to more people who it can’t afford to loan to now. In other words, the industry just wants to “help” people.

The only problem with this argument, of course, is that it doesn’t make any sense. It is, in fact, the same argument made by the 400% payday lenders.

Think about it: if the industry can’t “afford” to loan to some people (even at 54% APR) it’s because those people are too high of a risk – that is, too many of them won’t be able to make their payments. Well, if that is so, how does it “help” these people to give them loans that are even more expensive?! Sure, some poor souls will pay off the 90% loans – at least until they’re refinanced into even larger loans – but, is that the real answer to what these people “need”? How many people struggling to make ends meet will really find the solution to what ails them in a 90% loan – a rate that would be among the highest permitted in the country?

Powerful voices in opposition – There are other flaws with the proposal – things like the new proposed fees and rates on defaults and other less obvious parts of the loan transaction. These are the kinds of things the average loan company borrower would never notice or understand in million years and speak volumes regarding the need for strict regulation in the first place.

But perhaps the most compelling red flags one can find about the bill can be found in the list of who’s for it and who’s against it. Of course, there’s only one organized group supporting the bill – the industry that stands to make as much as another $100 million per year from North Carolina consumers. And while they’ve purchased a big group of lobbyists – at least seven at last count – they’ve not been able to prevent a large collection of consumer advocates like the AARP, NAACP, and an umbrella group known as the Coalition for Responsible Lending from joining together in opposition.

Yesterday, another powerful opponent was added when the Navy Marine Corp Relief Society, a group whose mission is to provide, financial, educational, and other assistance to members of the Naval Services of the United States, sent a letter to state lawmakers. Here’s some of what the head of the group, Retired Admiral Steve Abbot said in that letter:

Many high cost lenders target military personnel and families. It’s a disservice to those protecting our freedoms to be burdened with high interest debt that can create unnecessary hardships for them and their families.

This legislation will increase the already high interest rates and fees charged on consumer finance loans in North Carolina. We believe these changes would be harmful to Sailors, Marines and their families struggling to make ends meet in this difficult economy.”

Going forward

The bottom line of the lending proposal, of course, is that it has nothing to do with helping average people, creating jobs (except maybe for debt collectors) or advancing the North Carolina economy. As Admiral Abbot’s letter makes clear, the only thing the proposal would do is make things harder for a lot vulnerable people and raise the bottom lines of a few large, well-connected corporations.

Well, that, and show once and for all, what the conservative leadership in the General Assembly is really all about.

About the author

Rob Schofield, Director of NC Policy Watch, has three decades of experience as a lawyer, lobbyist, writer and commentator. At Policy Watch, Rob writes and edits daily online commentaries and handles numerous public speaking and electronic media appearances. He also delivers a radio commentary that’s broadcast weekdays on WRAL-FM and WCHL and hosts News and Views, a weekly radio news magazine that airs on multiple stations across North Carolina.
[email protected]