High Interest Rate Lending Touches Entire Communities – Not Just Individual Borrowers
By Kerri J. Smith
City Executive, Self-Help Credit Union
Much of the discussion around payday loans and auto title loans has to do with the impact they have on individual borrowers. The larger discussion needs to be on the effects of these loans on cities, homelessness, businesses and health. Studies produced by a variety of sources show that these loans create a ripple effect throughout the entire community.
Lenders in South Carolina can charge any interest rate they choose according to the 1982 lending deregulation law. Each year, these lenders must file their maximum rate with the S.C. Department of Consumer Affairs, and the 2020 State of Credit Report shows rates ranging from 45.5 percent-520 percent for 2019.
SC Appleseed Justice Center reports that in 2018 there were 687,855 loans given to 86,112 borrowers – averaging roughly eight loans per borrower. These borrowers paid $44.1 million in fees; however, when you add in auto title lending the amount paid by borrowers jumps to $245 million in interest and fees.
Communities are losing tax revenues due to a decline in discretionary spending. High-interest rate loans are also contributing to homelessness through eviction and foreclosure.
Individuals caught up in debt traps find that they cannot afford the payments on these loans even though S.C. law requires lenders verify ability to repay. Lenders require an automatic repayment through personal checking accounts. When funds are not available when checks are presented, consumers rack up NSF fees and many times, accounts are closed as a result. Also, other household expenses such as rent or mortgage become delinquent, medical care is postponed and that can lead to loss of hours worked due to stress.
This cycle places strains on public assistance, nonprofits, churches and businesses. In the study done by Salary Finance, they found that workers with financial stress are 5.8 times more likely to miss deadlines, 4.9 times more likely to produce lower quality work and four times more likely to suffer from depression. All of these outcomes cost companies.
In a study conducted by Institute for Policy and Research, the health risks of high-interest rate loans compared to non-borrowers are significant, with 41 percent having more negative physical symptoms, 41 percent higher C-reactive protein (a marker for heart disease), and 11 percent higher body max index (BMI). Poor health leads to higher healthcare costs.
One demographic that is immune to these predatory loans is active-duty military and their dependents, because they are protected by the federal Military Lending Act, passed in 2006, that capped rates at 36 percent inclusive of fees. This law has had a significant positive impact for service members and their families.
I have seen all of these situations firsthand and work daily with a variety of nonprofits and churches that serve those that have fallen into the cycle. When you see a 70-year-old woman coerced into a $1,700 loan at 175 percent interest with payments of over $279 per month when she only receives $752 in Social Security, you realize this is not fair but predatory.
In February 2020, several organizations came together to bring awareness and advocate for an expansion of the Military Lending Act to all citizens of South Carolina. The SC Fair Lending Alliance is working with SC Appleseed and the Center for Responsible Lending to design legislation that will provide protection, provide oversight of alternative lenders and close loopholes in the current law. The alliance launched a website to be a resource for news and events at www.capratesc.com and they have a Facebook page, CapRateSC.
Also, the South Carolina House Subcommittee of Labor, Commerce and Industry held a hearing on H. 4749 – South Carolina Predatory Practice Protection Act filed by Rep. JA Moore of Charleston. Over 120 people attended the hearing in support of the legislation, with testimony of several organizations and individuals as to the impact of these loans. The meeting adjourned with Chairman David J. Mack III (D-Charleston) promising more work on the issue without setting a follow-up hearing date.
Now it is time for South Carolina to join our neighboring states, Georgia and North Carolina, in reining in these high-interest lenders by capping rates at 36 percent - protecting communities, businesses and our citizens.