The Dangers of Authorizing Debt Trap Loans in NC
North Carolina experimented with high cost loans between 1997 and 2001, when payday loans were legal in our state. Now we risk blessing usurious debt again. We have put in place a strong cap on usury, the practice of lending at unreasonable interest rates.
Senator Rick Gunn, a Republican from Burlington, introduced SB 681 which would double or in some cases triple interest rates on consumer installment loans. Current law caps the annual percentage rate on installment loans at around 40 percent. This bill would allow APRs as high as 80 to 125%. The increase would come just two years after the same lenders persuaded lawmakers to allow them to charge higher rates on a wide range of loans.
Gunn’s Bill would harm families in North Carolina and violate our shared desire to create and maintain a vital community and support an abundant life for all. Interest rates of 80 percent are usurious and violate our highest values. People of faith are called by God to help the poor, never to take advantage of them.
We thank the fact that payday loans have been illegal in North Carolina since 2001. Research clearly shows that payday loans are debt trap loans, designed to keep borrowers in debt at high interest rates for as long as possible. SB 681, with its extraordinarily high interest rates and fees, would also keep borrowers in debt at high interest rates, resulting in another form of debt trap lending.
Federal regulators are well aware of the problems created by debt trap loans. The Department of Defense has proposed new rules to cap interest rates on installment loans to members of the military at an all-inclusive APR of 36%, well below the limits allowed by SB 681.
On another front, the Federal Bureau of Consumer Financial Protection is considering a proposal to protect the general public by curbing the abuse of installment, payday and car title loans. The proposal is smart, fair and flexible, but it includes a loophole that advocates will push the CFPB to close – an option that allows lenders to grant loans without determining whether a consumer has the ability to repay the loan without renewing the loan. or fall behind on other bills.
No one in North Carolina should have to choose between
The protections we have in North Carolina are the result of great efforts. North Carolina was the first state to ban payday loans after it was legalized. After the ban, the North Carolina attorney general and banking commissioner waged a multi-year campaign against predatory lenders who used various ploys to stay open. This experience should show lawmakers and federal regulators the dangers of loopholes or laws reopening the door to predatory lenders.
Our General Assembly and our federal regulators must protect our citizens from debt trap loans. A strong state usury cap, like ours in North Carolina, is the most effective way to prevent high cost loans. The CFPB is not authorized by law to set a federal usury ceiling; therefore, our state legislators must maintain our strong cap in North Carolina to keep illegal debt trap lending in our state.
It is imperative that we urge our lawmakers for continued usury protection so that predatory lenders do not have the opportunity to trap our neighbors in crushing debt.
Hope Morgan Ward of Garner is the resident bishop of the NC Conference of the United Methodist Church.