Lenders have come under fire in Washington in recent years. But one corner of the financial industry – lending to the poor Credit scores – has found a sympathetic audience in many state capitals.
In the past two years, lawmakers in at least eight states have voted to increase the fees or interest rates that lenders can charge on certain personal loans used by millions of borrowers with below par credit.
The revision of state credit laws comes after a lobbying push by the consumer credit industry and a wave of campaign donations to state lawmakers. In North Carolina, for example, lenders and their lobbyists overcame the unusually tenacious resistance of military commanders who warned two years earlier that hike in lending rates could harm their troops.
Lenders argued that interest rate caps had not kept pace with the increased cost of doing business, including running branches and hiring staff. Unless they can make an acceptable profit, the industry says lenders will not be able to offer loans that allow people with bad credit to pay for car repairs or medical bills.
But a recent regulatory filing by one of the largest sub-prime consumer lenders in the country, City group‘s OneMain Financial unit, shows that giving personal loans to people with limited financial resources can be a highly profitable business – even before state credit laws were changed. Last year, OneMain’s profit increased 31 percent over 2012.
“There was just no need to change the law,” said Rick Glazier, a North Carolina lawmaker who opposed industry efforts to change the pay structure in his state. “It was one of the most brazen advocacy efforts to increase their own profits that I have ever seen.”
Legislative victories in states such as Kentucky, Arizona, Missouri, Indiana, and Florida came at a particularly opportune time for Citigroup as the bank prepares to sell or spin OneMain into a separate, publicly traded company.
Another major sub-prime consumer lender, Springleaf Financial, went public last October, and its stocks have risen 78 percent since then.
OneMain is housed in Citi Holdings, where Citigroup holds vulnerable assets and businesses that it is trying to wind up. Subprime consumer lending is no longer in line with the bank’s broad strategy of focusing on wealthier consumers in big cities.
While OneMain may be part of the bad bank, it has been good business for the past few years.
OneMain with 1.3 million customer accounts offers its borrowers unsecured installment loans with interest rates of up to 36 percent. Borrowers pay both interest and principal in monthly installments until the loan is repaid, usually within a few years. But many of its borrowers refinance their outstanding balance.
About 60 percent of OneMain’s loans are so-called renewals – a trend one analyst calls “default masking” because borrowers may be able to refinance before they get into trouble paying back their current balance.
In the regulatory filing, OneMain said it would reassess existing customers’ creditworthiness before extending their credit.
“It is important that our branch employees normally live in the communities in which they work,” said Mark Costiglio, a Citigroup spokesman, in a statement. “These face-to-face exchanges add significantly to our value to our customers as we work together to assess their household budgets and their ability to repay their loans.”
The high rate of installment loan renewals was an issue that worried the North Carolina military when the industry lobbied for the state’s yield hike in 2011.
Commanders from Fort Bragg, home of the army‘s Special Operations Forces and Camp Lejeune, the naval base, rarely come out so publicly to denounce a bill, some lawmakers said. But they made an exception for installment loans. One commanding officer feared that “debt that got out of hand” could jeopardize soldiers’ security clearances.
The bill, which would allow lenders to make larger installment loans at the highest allowable interest rate, “not only puts our soldiers at risk,” Maj. Gen. Rodney O. Anderson, a acting chief in command at Fort Bragg, wrote to the North Carolina Senate in June 2011 ” it endangers the security of our nation ”.
To drive the changes forward, the North Carolina Financial Services Association, which represented OneMain and Springleaf, as well as lobbyists for dozens of smaller, locally-based lenders argued that the credit limits had not been updated in years. “Rents are higher, electricity costs more, gasoline costs more,” said the group’s lobbyist, Richard H. Carlton, in an interview. “But the courses had not kept pace.”
Faced with strong opposition from military commanders, the bill died during the legislative period.
Nationwide, however, the industry’s lobbying was only just beginning, especially in countries with many military personnel and borrowers with poor creditworthiness and low incomes.
Missouri lawmakers passed law last year that doubled allowable fees to 10 percent of outstanding loan balance, up to a maximum of $ 75. Indiana and Arizona allowed lenders to make larger loans at higher interest rates.
In Maine, a OneMain lobbyist argued that subprime borrowers in need of credit were better off borrowing from regulated installment lenders than reaching out to payday firms, which are often beyond the reach of most regulators. A Maine lawmaker who helped fund a bill that would allow installment lenders to charge the 30 percent maximum interest rate on the first $ 4,000 on a loan, up from $ 2,000, was impressed by the lender’s low defaults.
“I urge you to go to a OneMain Financial office,” said Alan Casavant, now Mayor of Biddeford, Me., In a written testimony. The bill ultimately failed.
When installment lenders made another lobbying push in North Carolina last year, their fate turned. Newly appointed commanders of the state military institutions seemed more willing to accept an increase in the interest structure.
A general agreed to drop his opposition to the law if company commanders had to sign off before their soldiers could take out a loan. However, other generals said their officers lacked the time or expertise to provide financial advice. Brig. General Thomas A. Gorry of the Marine Corps called this requirement “a potentially dangerous” distraction.
In the end, the generals, some of whom were relatively new to their commandos at the state’s military bases last year, took “no position” on the bill. Some commanders just didn’t want to keep resisting, while others didn’t feel as badly hostile as their predecessors, according to people who were briefed on their thinking.
Another long-time opponent, the Center for Responsible Lending, also dropped its opposition to the law after the industry agreed at the last minute to cut some proposed rate hikes, said Chris Kukla, the group’s senior vice president. “It was a question of whether we stand or try to mitigate some of the damage,” he said.
Under the previous law, lenders could charge 30 percent interest on loans up to $ 1,000 and 18 percent on any balance of $ 6,500. The new law allows interest rates of up to 30 percent on the first $ 4,000 of a loan and 24 percent on the next $ 4,000.
North Carolina lawmakers, meanwhile, have raised hundreds of thousands of dollars in campaign contributions from the consumer finance industry. Spokesman Thom Tillis, who supported the bill in the House, was one of the biggest beneficiaries. Mr. Tillis, a Republican running for United States Senate, has received more money from the American Financial Services Association than any other Senate candidate, according to OpenSecrets.org.
Mr Tillis’ campaign manager Jordan Shaw said the donations did not affect his election record. “He wanted to make sure people still had these loans as an option,” Shaw said.
“He also recognized that the risks can drive interest rates high.”