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Legal loan sharks face extinction
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.


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