Legislation Protects North Carolina Consumer Access to Small Dollar Loans

Online, April 6, 2011 (Newswire.com) - Raleigh, North Carolina - As uncertain economic times persist, it's critical that consumers continue to have access to safe, affordable, and responsible installment credit. While many credit products have gained a large market share over the past 15 years due to ease of borrowing and flexible payment terms, many lacked the disciplined debt reduction features of the traditional amortizing installment loan.

Today, NC Representative Fred Steen (R-Rowan County) along with primary co-sponsors Rep. Harold Brubaker (R-Randolph County), Rep. Kelly Alexander (D-Mecklenburg County) and Rep. Bill Owens (D-Pasquotank County) introduced important new legislation to address a long standing need-updating the NC Consumer Finance Act. The objective of the legislation is to ensure that North Carolina consumers have continued access to responsible small dollar installment loans by addressing existing sustainability issues for this Main Street lending option.

"North Carolina's small dollar installment loans have always provided the safe and affordable loan option for consumers, and I feel it is critical that we implement reasonable updates to protect consumer access to this credit," said Representative Steen. "Not only is it important to consumers, it is also very important to our state's economy because these loans are used for everyday goods and services that are purchased in local communities throughout North Carolina."

In the last 12 months, both the Commissioner of Banks and a Joint Legislative Study Commission on Modernizing the Consumer Finance Act looked into the long-term issues of meeting personal loan needs in North Carolina. During those reviews, it was noted that NC has seen a steady decline in not only the number of traditional consumer finance offices, but their ability to offer the small dollar loan increments which are much needed in this state.

For review of this issue, the industry provided the Commissioner of Banks two separate surveys of lender costs for installment loans. These surveys were designed and conducted by a nationally respected, independent accounting and tax firm. As with all business and industry, rising costs were seen as an issue. "Costs have risen significantly since the Consumer Finance Act was last adjusted 28 years ago. Without due consideration for changing times and financial demands, this vital consumer loan option is at risk at a time when responsible credit is needed most," said Everett Wallace, Special Counsel for the North Carolina Credit and Personal Finance Council.

Mr. Wallace added that, "We are confident that NC installment loans meet the benchmarks for high quality credit set by all the major consumer advocacy groups-loans that are marketed transparently, structured to support repayment, with customer's repayment history reported to credit bureaus to build a financial future. It is important that we ensure that reasonable legislation is in place to keep this responsible consumer loan option accessible for consumers."

The Banking Commissioner also received a Consumer Finance and Credit Complaint Report. The data was compiled by the Consumer Protection Division of the NC Dept. of Justice for 2008, 2009, and YTD 2010. Data from the report indicated that total complaints were low and consumer satisfaction high. NC Consumer Finance Companies comprised only 5% of financial services complaints filed with the Consumer Protection Division over the three year period.

"There were over 980,000 personal loans made by consumer finance companies during this time. The fact that only 245 total complaints were filed with the Attorney General's office in a three year period of recession is a strong affirmation of the industry's commitment to high quality loans and one-on-one, personal relationships. Taking time to create these relationships adds to the cost, but also creates a sense of responsibility and discipline to these loans that serves the consumers well," stated Mr. Wallace.

National consumer advocacy groups have also consistently recognized the need for these responsible loans. The Center for Financial Services Innovation, a national consumer advocacy group, told the American Banker last October, "Demand for small amounts of credit is high. We need to increase access to responsible, scalable, and ultimately profitable forms of credit for households that need and can benefit from it."

The Center for Financial Services Innovation presented its conclusions from a recently completed report, saying that because of the high-touch aspects of this lending model, installment loans are more costly to provide. The CFSI report concluded that the primary cost drivers for installment lending arise from the genuine expense of operation of physical offices, underwriting costs, and the "high touch" management of the loans.

"The reality of the economics of this business has become clear to consumer advocates and federal financial regulatory agencies. We are confident that the NC Legislature will recognize them as well," stated Mr. Wallace. "The FDIC and the Federal Credit Union Administration last year also found that small dollar loans require high touch interaction with borrowers. Profitability results were not promising for banks making small dollar loans, and other inducements would be necessary such as Community Reinvestment Act requirements or taxpayer subsidies to cover losses."

Representative Steen also addressed this issue: "North Carolina's small dollar installment loans provide a disciplined option for consumers faced with unexpected financial needs or necessary household purchases. It presents the most viable credit choice for many consumers, just as it did in its inception in 1945. Serious consideration needs to be given to this issue of reasonable sustainability for small loan providers. If we don't, a very important option for consumers will be diminished, and that would be a shame."

Contact: Everett Wallace, NC Credit and Personal Finance Council, 919-389-8822, [email protected]