Action Alert: consumer installment loan bill in the House will hurt consumers

There is a “consumer lender loans” bill that has made it through the House Rules Committee after approval by the House Finance Committee, HB 2526 (.pdf). It is on the Committee of the Whole (COW) Calendar #10 for TODAY. Contact your legislators to oppose this bill:

From the House Summary of the bill:

HB 2526 modifies the finance charge structure of consumer lender loans and increases the loan origination fee cap.

Current statute prohibits a licensee from paying a fee, commission or bonus, or give anything of value to any merchant, dealer, consumer, or other person in connection with attracting applicants or referring business, with exceptions (A.R.S. § 6-611).

Provisions

·          Increases the cap on loan origination fees to $150.

·          Allows a licensee to pay a fee, commission or bonus, or give anything of value to any merchant, dealer, consumer, or other person for referring business in an amount of up to $100 per completed loan.

·          Allows a licensee to give a consumer any prize, good, wear, merchandise, or tangible property in an aggregated amount of up to $25.

·          Modifies the finance charge structure of consumer lender loans, and consumer revolving loans as follows:

Current

Original Principal Amount/

Credit Limit

Finance Charges/ APR

max rates

$1,000 or less

36%

Greater than $1,000

36% on the initial $500

24% on the remaining balance

Proposed

Original Principal Amount/

Credit Limit

Finance Charges/ APR

max rates

$3,000 or less

36%

Greater than $3,000

36% on the initial $3,000

24% on the remaining balance

·          Makes technical and conforming changes.

Amendments

Committee on Financial Institutions

·          Restores the prohibition relating to paying a fee, commission, or bonus or give anything of value to any merchant dealer consumer for referring consumer lender loan business.

·          Prohibits a licensee from increasing the established rate on a loan that was issued prior to the effective date of this act when modifying or restricting such loan provided that the total new cash advances of the loan does not exceed $100.

·          Prohibits a licensee from holding a person responsible for a loan that was incurred as a result of theft or fraud.

·          Requires a licensee to correct any derogatory credit information within 30 days after knowledge that the loan was a result of such theft or fraud.

The Center for Economic Integrity has issued this Statement on the bill:

OPPOSE HB2526

HB2526 increases the cost of consumer installment loans, reduces competition and consumer choice, and rewards making of loans with little regard for a borrower’s ability to repay the debt.

HB2526 hikes fees while failing to prevent reckless lending.

The bill does not establish any underwriting standards that assess whether the borrower can both repay the loan and meet their other existing obligations. Springleaf, the consumer installment lender pushing HB2526, openly admits that it cannot be certain that each loan is made in accordance with the company’s own underwriting guidelines.i Higher loan charges lead to looser underwriting standards and more defaults, thus harming the consumers but also other creditors and businesses to which borrowers have existing obligations.

HB2526 hikes fees while failing to prevent debt trap lending.

Rampant refinancing is core to the business model of high-cost installment loans like those permitted under HB2526. Lenders encourage borrowers to refinance multiple times before they have paid off the loan, collecting new fees for things like insurance premiums (for insurance products made by the lender’s wholly owned subsidiary) at each refinancing and creating a bigger hole in the borrowers’ budget. A debt trap ensues. Data show that 75% of consumer installment loans are due to refinancing by existing customers.ii Increasing the fees as proposed here will perpetuate this pattern by making the loans more difficult to repay and increasing the financial incentive for churning.

HB2526 creates loans that are risky for borrowers, not lenders.

HB2526 will allow loans as large as $3,000 to carry annual interest rates of 36%, plus 5% origination fees up to $150 (more than double what is currently permitted). Currently, Arizona law permits loans of $500 or less to carry 36% APR and a maximum $75 in fees, and loans above $500 are appropriately subject to lower limits. These charges are in addition to junk fees for insurance products sold by the lender that can add hundreds of dollars to the loan cost, and can be charged with each refinancing.

These dramatic fee hikes–with no corresponding requirements to underwrite the loan or limit refinancing or limit sales of ancillary insurance products– increase the financial incentive to generate higher volumes of expensive loans with little regard to actual loan performance.

The danger of reckless lending with disregard to loan performance is compounded by the fact that the lender typically shields itself from loss: typically more than 80% of these loans are secured by borrowers’ personal property and loans are frequently refinanced (masking default rates). Furthermore, companies such as Springleaf, (which is in part owned by Wall Street firm AIG), wash their hands of bad loans by selling them to Wall Street as securities,iii much like mortgage loans which fueled the foreclosure crisis, as well as selling off the debt they cannot successfully collect.iv

Consumer Loan Lenders Typically Charge the Max Permitted By Law

In its 2012 annual report to investors, the national consumer installment lender, World Acceptance, noted “that virtually all participants in the small-loan consumer finance industry charge at or close to the maximum rates permitted under applicable state laws in those states with interest rate limitations.”v Similarly, in an in-depth examination of the consumer installment lending industry, the Commission on Banks in North Carolina, where Springleaf and OneMain Financial are among the state’s top three lenders, determined that “licensees were charging the maximum blended rate allowable.”vi HB2526 will not drive down prices as lenders claim, but will instead increase them.

Screenshot from 2014-02-27 12:23:38

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