Kukla: Raising interest rates will hurt poorest borrowers most

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A debate is raging in the North Carolina General Assembly over whether to raise the rates and fees that consumer finance companies can charge. You might think that since the commanders of all the military bases in the state and the Department of Defense oppose this increase, lawmakers wouldn’t be having the discussion at all. You might think that lawmakers wouldn’t want to see millions of dollars in extra interest flow out of state to American General and CitiFinancial — owned by New York conglomerates AIG, Fortress Investment Group and Citigroup — who dominate this market. And you might think that legislators would instead be debating how citizens can reduce their debt or borrowing costs in these challenging times.

You would be wrong.

Since 2001, consumer finance companies have been telling the state legislature to significantly increase the rates and fees the firms can charge on consumer finance loans or else these companies would not survive. Keep in mind that under North Carolina’s Consumer Finance Act these companies already are allowed to charge annual percentage rates of between 30 and 50 percent. That’s apparently not enough for the companies who argue that they need to charge more money to counter rising costs — even though the cost of obtaining funds to lend is at a historic low.

A recent report from their regulator, the North Carolina Commissioner of Banks says otherwise. That report showed that, even though 2008 was one of the worst-performing years for financial institutions, the vast majority of consumer finance companies have turned a profit every year in the past decade.

The report, prepared at the request of the legislature, also said that raising rates and fees at this time would be inappropriate. We agree: raising rates will not make more credit available; it will just make it much more expensive.

Despite these findings, lawmakers in both the House and Senate have introduced bills allowing consumer finance companies to raise annual percentage rates on their loans up to 100 percent. House Bill 810 is sponsored by state Reps. Fred Steen, R-Rowan, Harold Brubaker, R-Randolph, Bill Owens, D-Pasquotank, and Kelly Alexander, D-Mecklenburg, and Senate Bill 761 is sponsored by state Sens. Don East, R-Stokes, and Bob Rucho, R-Mecklenburg.

The Department of Defense and the garrison commanders of every military base in North Carolina oppose any increase in rates and fees, because an increase would especially harm our men and women in uniform and impair military readiness. The Navy-Marine Corps Relief Society reported that they spent $50 million last year nationally to help marines and sailors get out of serious financial difficulties, mostly due to installment loans like these.

More than 200 organizations and individuals representing more than three million North Carolina voters who are part of the North Carolina Coalition for Responsible Lending also oppose any increase in rates and fees. Included in this statewide coalition of concern are well-known and respected voices, including the North Carolina AARP, the North Carolina AFL-CIO, the Credit Counseling Agencies of North Carolina, the N.C. Justice Center, and the N.C. NAACP.

It also is worth noting that Citi-Financial and American General (owned by AIG and Fortress Investment Group, a New York hedge fund) represent 66 percent of the consumer lending business in the state. These two entities make up the N.C. Financial Services Association, which has hired four lobbyists to complement the in-house lobbyists for CitiFinancial and American General. Companies don’t hire six lobbyists to make minor changes — there must be a significant financial gain involved to make the expense worthwhile.

Four other large, out-of-state lenders represent an additional 14 percent of the market, which means that six companies based elsewhere control 80 percent of the market. Any increase in the rate structure means even more millions of dollars will flow out of the state to large financial conglomerates in New York and South Carolina.

This bill will simply raise rates on people who are trying to make ends meet or find themselves on the wrong end of a financial emergency. It will harm our military. And, there is no evidence or data that raising rates and fees would make loans more available — it will just make them much more expensive.

Raising the costs of credit for already struggling families when the lenders already are profitable makes no sense. Even in robust financial times, this bill is a bad idea. However, in today’s time of economic pain for many families (and particularly for working families), this bill is as ill-timed as it is ill-advised. We hope that the Legislature will place our citizens ahead of the interests of already profitable high-cost lenders.

C hris Kukla is senior counsel for government affairs at the Center for Responsible Lending in Raleigh