Legal loan sharks
By Andy Brack
SC Statehouse Report
MARCH 2, 2003 - - One way or another by summer, South Carolinians
will have new consumer protections against unscrupulous lenders.
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By enacting legislation against "predatory lending,"
lawmakers will make it more difficult for the purportedly small
number of shady lenders to take advantage of people, especially
the elderly, poor and minorities. Currently in South Carolina, some
lenders promise easy money to cash-strapped people if they put up
their homes or other property as collateral.
But sometimes folks who borrow money by putting up their homes
or property can't afford to make payments because they're on fixed
or low incomes. When they can't repay, they borrow again, or "flip"
the loan and interest into a bigger loan. If they do this a number
of times, the equity they've built over a lifetime gets stripped
from their property and, in some cases, they lose their homes.
Legislation to fix the problem is on a fast track in both chambers
of the South Carolina General Assembly. Last week, the Senate Banking
and Insurance Committee passed tough new rules to curb predatory
lending practices. The bill could be considered on the Senate floor
as early as this week.
In the House, the Labor, Commerce and Industry Committee this week
will take up similar legislation that generally is considered friendlier
to the lending industry. But House LCI Chair Harry Cato, R-Greenville,
says the House bill strikes a good balance in that it protects consumers,
but doesn't dry up the availability of credit in the state.
What's likely to happen is the bills will go to a conference committee
within a month where House and Senate conferees will hammer out
a compromise. But based on what's in each bill now, it's pretty
clear there's agreement in three major areas:
Home loans. Both bills seek to prohibit "flipping," the
practice of refinancing a loan without a tangible benefit to the
borrower. Lawmakers also seek to have lenders objectively evaluate
whether borrowers can reasonably be expected to repay loans before
issuing them. Lenders who don't take consumer precautions could
be held liable for issuing a predatory loan. Lenders also will have
to make disclosures about their fees and put limits on the points
and fees that can be financed.
Title loans. The bills also address the practice of relatively
small short-term loans some consumers get by putting their cars
up for collateral. Although provisions are slightly different, the
bills limit the number of times people can rollover a loan. For
example, if someone borrows $500 for 30 days and they can't repay
the loan at the end of the period, the borrower would be able to
rollover the loan, but would have to pay off the interest before
doing so. Currently, interest may be rolled into a new loan. By
making borrowers pay interest up front, the loan doesn't grow to
the point that the consumer's property is seized when the value
of the loan equals the value of the consumer's equity in the property.
Manufactured housing loans. Both bills also require the manufactured
housing industry to have a short "cooling off" period
for people who want to buy a manufactured home on credit. Instead
of being able to walk in and buy a home on the spot, purchasers
will have to wait two or three days to complete the transaction.
The cooling-off period gives them time to consider disclosures of
fees and other information from the lender.
The House and Senate bills aren't exactly the same. They have differences
over disclosures, whether borrowers should receive credit counseling
and whether credit life insurance should be part of what can be
financed in a loan.
But what's interesting about the effort to create more consumer
protections for borrowers is the state is shifting from asset-based
lending to income-based lending. In other words, instead of lenders
who provide loans simply based on the assets you have, they soon
will have to take into account objective criteria to determine whether
you can repay the loan.
Most banks do this now. But the new legislation should make it
safer for cash-strapped, asset-rich people on fixed incomes. In
the future, they should be better able to keep their homes instead
of losing them to an unscrupulous lender.