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The Consumer Finance Act – The Claims and The Truth. Chris Kukla Center for Responsible Lending Webinar December 16, 2010. 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.

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the consumer finance act the claims and the truth

The Consumer Finance Act –The Claims and The Truth

Chris Kukla

Center for Responsible Lending Webinar

December 16, 2010

the nc consumer finance act
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
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
nc consumer finance act1
NC Consumer Finance Act
  • 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
nc consumer finance act2
NC Consumer Finance Act
  • 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
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 activity1
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
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
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
what have we learned1
What Have We Learned?
  • 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
what have we learned2
What Have We Learned?
  • 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
what have we learned3
What Have We Learned?
  • 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.
what have we learned4
What Have We Learned?
  • 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
what have we learned5
What Have We Learned?
  • 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
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
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
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
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
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
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
Contact Information

Chris Kukla


Susan Lupton