Http:// The Consumer Finance Act – The Claims and The Truth Chris Kukla Center for Responsible...

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The Consumer Finance Act –The Claims and The Truth

Chris Kukla

Center for Responsible Lending Webinar

December 16, 2010

http://www.responsiblelending.org 2

The NC Consumer Finance Act

Current iteration of NC CFA enacted in 1961. Adjustments made about every three years through

1981. CFA restructured in 1981. Processing fee added in 2001.


NC Consumer Finance Act

Split into two sections – G.S. 53-173 and G.S. 53-176.

53-173 allows: 36% interest on first $600 of loan balance, 15% interest on balance between $600 and $3000 A processing fee of 5% of loan balance, capped at $25 Processing fee cannot be charged to same borrower

more than twice in a 12-month period Only 7 companies operate under 53-173



53-176 allows: Loans up to $10,000 Interest of 30% on balance up to $1000 Interest of 18% on balance between $1000 and $7,500 Interest of 18% on entire balance if loan more than

$7,500 Processing fee:

– For loans $2,500 and less, fee up to $25

– For loans $2,500 and above, 1% of loan balance capped at $40



Other Protections: No confessions of judgment No wage garnishment No late fees Interest limited to 8% after maturity No real property as collateral Significant limits on mortgage loans made in same

location All other activities must have NCCOB approval.


Consumer Finance Act – Recent Legislative Activity

Bills to increase fee and interest limits introduced every year since 2001 adjustments.

2008 – House Select Committee on Unbanked and Underbanked Consumers Consumer finance was main topic Committee recommended no changes, continued study


Consumer Finance Act – Recent Legislative Activity

2009 -- Joint Legislative Study Commission on the Modernization of North Carolina Banking Laws and the Consumer Finance Act Again, consumer finance main topic of discussion Attempt to add $25 late fee withdrawn Called on NCCOB to gather industry and consumer groups to:

– Study available data and collect any other data useful in looking at industry

– “All recommendations for modifications to the Consumer Finance Act must be linked to the goal of understandable, transparent, effective and fair credit. The laws governing consumer credit must contain all appropriate consumer protections, and must also recognize the requirement for the potential profitability for the lender.”

Report due to legislature before they convene on January 26, 2011 UNC Center on Community Capital commissioned to write report.


Who are Consumer Finance Lenders?

According to last NCCOB report, 86 companies with 489 offices across state.

Citifinancial and American General (AIG) have: 42% of offices – 204 out of 489 66% of loans receivable outstanding – about $800

million of $1.2 billion

Other offices range from larger players (Security Finance) to regional chains to one or two store operations.


What Have We Learned?

Consumer finance companies have been profitable. NCCOB reports show that most companies were

profitable, even during downturn of 2008 NCCOB data has flaws that may understate profitability

Unaudited, self-reported data Data reported in aggregate/averages Most use tax related data Vested interest in keeping revenue low and expenses high


Consumer Finance Companies/Profits



Loan churning a big problem. In 2009: 69.2% of loans made to renew existing accounts 11% of loans made to customers with previous loans Only 19.7% of loans made to new customers “I always have a loan with American General.” “Borrow against the equity in your loan.” Never pay off the loan due to repeated refinancings/

distress refinancings



Use of personal property as collateral 96% of small and medium lenders’ loans used personal property as

collateral Provides lender with significant leverage in collections Also allows lender to charge for UCC non-filing insurance Consumer finance companies charging unsecured rates on secured

loans Use of Cars as Collateral

Borrow against the car you own free and clear Refinance12

– Example: Consumer owes 3 more years on purchase money loan– American General refinances into a higher interest rate 5 year loan– “Lowers your monthly car payment”– Potential cash out at closing



Sale of credit insurance is high. Credit Insurance (single premium)

Credit life Credit disability Credit unemployment Credit property Own affiliated insurance companies Only 20-30 cents of every premium dollar used to pay

claims – the biggest chunk pays commission to finance company.



Consumer finance business is stable. Reduction in offices due to large players exiting market HSBC folded Household/Beneficial in order to exist

US subprime business altogether Equity One (Banco Popular) sold to AIG/American

General Sallie Mae exited consumer lending business Wells Fargo folded finance company operations into

bank structure



While some offices have closed their doors, more have either started operations or expanded existing operations.

Large company data skews the entire set, making determinations difficult.

Better data collection necessary and coming. Indirect lending large part of business, but little

known about it.


What Do the Consumer Finance Companies Want?

Changes to rate and fee structure. Last legislative proposal would have allowed: Loans up to $20,000 30% interest on balance up to $5,000 24% interest on balance up to $10,000 18% interest on balance up to $15,000 18% interest on entire balance on loans above $15,000 Processing fee of $35 on loans up to $3,500, and 1% of loan

balance capped at $100 above $3,500 Late fee of 5% of payment amount capped at $25 Lender to charge borrower for credit report fees or any third-party

fees in addition to processing fees


What Do the Consumer Finance Companies Want (cont’d)?

Deferral charge of 1.5% of payment amount Eliminate limits on mortgages sold in same location Confessions of judgment Lender can charge borrower for attorney fees Wage Garnishment


Why Do They Want It?

Consumer finance companies seek greater profits and more guarantees. “I deserve a return on equity of 15%” – Chris

McKinley, President of Green Cap Financial ROE of 15% equal to that of Coca-Cola Looking for rate and fee limits that ensure profitability

Regular, upward adjustments of interest rate “brackets”

Profitability measured and guaranteed in ROE rather than actual dollars of profit.


What’s the Reality?

Consumer Finance Act strikes an effective balance: Opportunity to earn a profit

– Initial data suggests that 80% of companies excluding Citifinancial and American General were profitable in 2008

Important consumer protections– Consumer finance companies charge maximum rates allowed

under law

– Interest rate and fee limits are essential to consumer protection.


NC Attorney General: Consumer Finance Complaints

284 AG complaints against 41 finance companies, 2008- 2010

Largest number of complaints: American General Citifinancial Carolina Finance


What Next?

More information on NC website

“Tell Us About Your Finance Company Loan”

Join the Coalition or email me your contact info

Presentations to your group


Contact Information

Chris [email protected]

919-313-8520

Susan [email protected]

919-313-8521

www.responsiblelending.org

Http:// The Consumer Finance Act – The Claims and The Truth Chris Kukla Center for Responsible...

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